2B — April 28 - May 11, 2017 — Owners, Developers & Managers — M id A tlantic
Real Estate Journal
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O wners , D evelopers & M anagers By Deborah A. Nappi, CPA, MST, Sax LLP Physicians take advantage of rental property losses A recent IRS ruling is- sued in the form of a Technical Advice
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taxpayer may “group together” the activities arising from the various trade, businesses, or rental activities as a single en- tity if the activities are deemed an appropriate “economic unit” for measuring gain or loss for PAL purposes. In certain cases, the IRS has the authority to regroup a taxpayer’s activities especially if the principal purpose of the grouping is to circumvent the PAL rules. These rules sus- pend otherwise deductible losses until passive activity is generated. In the case at the center of the TAM ruling, the taxpayer was a physician who was an employee and percentage shareholder of two medical practices (both S corporations). Along with many other physicians, he also held a small ownership interest in a limited liability company that owned a percentage of an outpatient surgery center. The physician viewed this LLC as an alternative surgery location for his patients, and the invest- ment had no impact on the income generated from either medical practice. On the filing of their joint personal income tax returns, the physician and his wife treated the LLC “passive ac- tivity” as separate from the ac- The apartment building lo- cated at 3469 Kennedy Blvd. in the Heights neighborhood of Jersey City traded for $1.12 million or $140,000 a unit. “The property has significant value- add potential to be gained through the renovation and repositioning of the units as this section of Jersey City has seen tremendous rent growth,” added Matovski. The 185 Ave. E property is located in the Constable Hook neighborhood of Bayonne and traded for $415,000. “The build- ing’s location just steps from the 22nd St. Light Rail made it quite attractive to our buyer. There also are many new de- velopments sprouting up along Ave. E, and our client will look to benefit from the strong rental market in the immediate area,” said Matovski. 3420 Bergenline Ave. traded for $1.845 million or $307,000 a unit. “We had several com- petitive bids on the property. Ultimately, a 1031 buyer look- ing to further expand their stability with future upside for the buyers,” said Matovski.
Owners, Developers &Managers North Hudson Portfolio, a four-building package in Union City and West New York, trad- ed for $2.65 million. The prop- erties were acquired by a 1031 investor who was eager to purchase a value-add asset in a core market along New Jersey’s Gold Coast. n tivity of the medical practices. The IRS, however, wanted to re-group the activities into one single economic unit, given that they all fell within the medical industry. Ultimately, since the own- ership interests and exercise of control over the medical practices differed from those of the outpatient surgery center, the taxpayer’s reported posi- tion of separate activities was upheld. As a result, he was able to utilize losses generated by a passive rental activity to offset the passive income generated by his investment in the outpatient surgery center. Had it not been for the passive income generated, the rental activity losses would have been suspended and carried over to another tax year. Transactions subject to the PAL rules require careful consideration, but as this case demonstrates, can be incorpo- rated into an effective part of an overall tax strategy. *A technical advice memo- randum (TAM) is a written interpretation of tax law as it relates to a specific problem presented by a specific tax- payer. Deborah A. Nappi is se- nior manager of healthcare at Sax LLP. n existing urban retail footprint in Northern Hudson County came in with the best price and terms,” said Matovski.
M e m o r a n - dum (TAM)* ruled in fa- vor of a phy- sician’s tax treatment of his medical practice and o wn e r s h i p interest in
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an outpatient surgery center as separate activities under passive activity loss (PAL) rules. The ruling was based on several factors, including the lack of any direct relationship between the physician’s prac- tice and his lack of control over the outpatient surgery center. The advantage to the physician is that now the outpatient sur- gery center is considered pas- sive income, which can offset against rental property losses that would have otherwise been suspended and carried forward to future tax years. Under the PAL rules of Code Section 469, losses of passive activities may only be used to offset passive activity income. Passive activity describes any activity which involves the con- duct of any trade or business in which the taxpayer does not materially participate. A
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venMatovski represented the sellers in each transaction and also procured the purchasers. The properties included: • 3469 Kennedy Blvd. in Jersey City • 3420 Bergenline Ave. in Union City • 185 Ave. E in Bayonne • A 4-building package in Union City and West New York All properties are situated in one of the most mature and stable markets in New Jersey and are within walking dis- tance of major transportation hubs in Hudson County. “These properties are very desirable due to the strong in place cash flow, which provides short-term
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