14A — June 14 - 27, 2013 — Mid Atlantic Real Estate Journal
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C reative F inancing By Ralph Anderson and Michael McCabe, The Green Group Grouping your investments to save you tax dollars
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for a taxpayer to be classified as a real estate professional, they must materially participate in
ticipated actively.
axpayers looking to de- duct real estate losses are limited in the way
Judy; they are part-owners in 25 rental real estate properties, all of which generates losses. They spend 11 hours each per year dealing with each prop- erty, for a total of 550 hours. Judy also owns her own real estate brokerage firm, where she puts roughly 240 hours into a year. When testing whether or not James or Judy meet the material participation test, each property is treated like a separate activity and is tested individually, therefore they are each only spending 11 hours a year on the potential audited property and neither one par-
• Ownership • Location • Interdependencies Advantages
Grouping Grouping related active or passive activities is a technique that can convert otherwise pas- sive activities into non-passive activities. This combines them into a single activity, making it easier to clear the hurdles in being classified as a real estate professional. There are impor- tant factors to be considered in determining whether multiple activities can be grouped as a single activity. The major fac- tors are: • Similarities & differences • Control
a real estate activity and must spend at least 750 hours in total on such activ- ity. They also must spend half of their time dealing
they can use them due to passive ac- tivity limi- tations, IRC Section 469. Professional real estate agents, how- ever, can de-
James and Judy consult with their CPA, and he/she recom- mends that the couple should elect to group their rental ac- tivities together. Since they have cumulated 550 hours, they will pass the material participa- tion test. Additionally, Judy now meets the 750 hour test because the 550 hours from the proper- ties added to the 240 hours from the brokerage will now permit them to utilize the losses. Disadvantages However, there are some potential disadvantages. Once a taxpayer elects grouping, it remains in effect for all future tax years. This means, when a passive activity is substantially disposed of, any suspended loss- es (losses that were disallowed in prior years due to passive activity limitations) become active and can be used to offset taxable income. In James and Judy’s case, however, the sale of a single property won’t release the suspended losses because it would not be a substantial part of the now-single activity. If James and Judy sold a property that had $50,000 in accumulated losses, before grouping, the losses would have been able to offset other active income. After grouping, because it was only 1 of 25 properties, those losses are not available for them to take until a significant portion of the other properties have been sold. When making the grouping election taxpayers must dis- close to the IRS the multiple activities to be grouped as a single activity. This disclosure is important as it enables the IRS to review the grouping strategy employed for appro- priateness. While this election has po- tential to unlock powerful tax savings for real estate or other professionals, it’s important to consider how it fits into your fi- nancial future. Grouping can be a powerful tool or a big mistake if you do not have appropriate guidance. If you would like to knowmore and discuss further, please contact our office. Ralph Anderson, CPA is a managing partner at The Green Group, a tax and financial services consult- ing firm. Michael McCabe is a staff accountant at The Green Group. n
Ralph Anderson Michael McCabe
with real estate properties to be considered a real estate pro- fessional. An Example Imagine a couple, James and
duct these as ordinary active losses instead of as passive losses. Doing so allows them to utilize these losses to offset other active income. In order
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