Passive Activity Losses - Uncle Fed's Tax*Board

Example: If MAGI = $110,000, the $25,000 allowance is reduced by $5,000 to a
$20,000 maximum allowance. Once MAGI exceeds $150,000, the special
allowance is no longer available.
Exception: commercial revitalization deduction.
Examination Techniques:
• Look for taxpayers who are not real estate professionals (no entry on
Schedule E line 43), but deducted rental real estate losses in excess of
$25,000.
• Watch for returns with an AGI over $150,000 and rental losses were
deducted. If the taxpayer is not a real estate professional, the $25,000
offset is usually not available. In the absence of passive income or a
disposition, losses are not deductible.
• Ask for the taxpayer’s calculation of MAGI. Make sure that all addbacks
are included, including losses deducted as non-passive by a real estate
professional. See Reg. § 1.469-9(j).
$25,000 Allowance Supporting Law
• IRC § 469(i): $25,000 offset defined.
• Madler T.C. Memo 1998-112: Court ruled that taxpayers did not
materially participate in their condo operation and stated that their level of
participation did not even rise to the active participation standard.
Exceptions to Rental Definition
There are six exceptions to the definition of rental. Under Reg. § 1.469-
1T(e)(3)(ii), six types of activities normally defined as rentals, are treated as nonrental
activities, i.e. as businesses, in most cases. As a result, the active
participation standard and the $25,000 allowance do not apply. If the activity falls
outside the rental definition, it is passive or non-passive based on whether the
taxpayer materially participates. Following are the six exceptions:
1. The average period of customer use is 7 days or less. For example:
condo rentals, short-term use of hotel/motel rooms, and businesses that
rent videos/tuxedos/cars/tools, etc.
2. The average period of customer use is 30 days or less and significant
personal services are provided with the rental. Examples: hotels and
motels.
3. Extraordinary personal services are provided with the rental. Examples:
hospitals, nursing homes and boarding schools.
4. The rental is incidental to a non-rental activity.
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