Passive Activity - New in 2010 – An Overview of Internal Revenue Code 469 - John R. Dundon II, Enrolled Agent
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Passive Activity – New in 2010 – An Overview of Internal Revenue Code 469

Passive Activity – New in 2010 – An Overview of Internal Revenue Code 469

According to Revenue Procedure 2010-13 starting in 2010:

  1. A written statement is required to group similar business/activities.

  2. Managing LLC members must pass any of 7 tests for material participation the most popular of which is the 500 hours per year of work. Reg. 1.469-5t(a)

  3. A real estate agent is now considered to be a real estate ‘professional’ for tax purposes

There are essentially two types of passive activities. The first is business related in which the tax payer materially participates. The second is rental real estate and equipment leasing. This type of activity is passive whether the tax payer materially participates or not. There are 3 exceptions to the rental definition:

  1. If the aver customer use is 7 days or less – short term rental

  2. If the average use is 30 days or less and ‘significant’ services are offered

  3. If ‘extraordinary’ personal services are provided with the rental

Passive activity tax laws under IRC 469 apply to individuals, estates, trusts, personal service corporations and to a limited extent closely held ‘C’ corporations. Passive activity limits do not apply to partnerships, S Corps and widely held ‘C’ corporations.

The general rule is that passive losses can only offset passive income. Unused passive losses are carried forward indefinitely. If you do not have a PIG (passive income generator) that generates passive income then you must carry your passive losses forward with a few exceptions. Those exceptions include:

  1. $25,000 of rental real estate loss

  2. Rental losses of a real estate professional if he/she materially participated in each rental

  3. All current and carryover losses sold to an unrelated party in a fully taxable transaction

  4. K-1 line 1 loss from a 1065 trader in stocks and bonds

  5. Working interest in gas and oil

Non-passive income includes:

  1. Wages

  2. 1099 commissions

  3. Guaranteed payments

  4. Business in which tax payer materially participated

  5. Interest, dividend, royalty, capital gain on stocks or bonds

  6. Pension income, IRA, annuities

John R. Dundon, EA – 720-234-1177 – [email protected] – – DEFEND YOURSELF AGAINST THE IRS – Enrolled with the United States Department of Treasury to Practice before the IRS – Enrolled Agent # 85353. Under contract with the IRS as a Certified Individual Taxpayer Identification Number (ITIN) Acceptance Agent – I am a Federally Authorized Tax Practitioner (USC 31 Section 330 + IRC 7525a.3.A) regulated under US Treasury Cir. 230.