10C — April 26 - May 9, 2013 — Spring Preview — Mid Atlantic Real Estate Journal
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T ax S ervices By Maria DeGennaro & Ralph Anderson, The Green Group
Internal Revenue Code Section 469
T
he passive activity loss rules have developed into a complicated set
passive activity rules. Here is a basic breakdown of the rules and how they may re- late to you. What is
participates.
or portfolio.) These losses are suspended and carried forward as a deduction from
interest in the activity in a fully taxable transaction. What is Material Participation? To be considered as materi- ally participating in an activ- ity an individual must satisfy any of the following tests: * Participation of more than 500 hours * The participation consti- tutes substantially all of the participation in the activity * The participation is for more than 100 hours and this participation is not less than the participation of any other individual * The activity is a “signifi- cant participation activity” and this participation in all such activities exceeds 500 hours Materially participat- ing in the activity for any five years of the 10 years that pre- ceded the year in question * The activity is a “personal service activity” and there is material participation in the activity for any three years preceding the tax year in question * Facts and circumstances tests are satisfied, which re- quire proof of regular par- ticipation on a continuous and substantial basis How are these losses deducted? A loss arising from a passive activity is deductible against the net income of another passive activity. Losses that are not deductible for any particular tax year because there is insufficient passive activity income to offset them (suspended losses) are carried forward indefinitely and are allowed as deductions against passive income in subsequent years. Unused suspended losses are allowed in full upon a fully taxable disposition of the taxpayer’s entire interest in the activity. There are also special rules for real estate rental activities and real estate professionals. If you would like to knowmore about this topic and would like to discuss this further, please feel free to contact our office. Maria DeGennaro is a senior accountant at The Green Group Ralph Anderson, CPA is a managing partner at The Green Group, a tax and financial services consult- ing firm. n
Generally, losses from pas-
of guidelines since their i n c e p t i o n . If you keep in mind the and have a general un- derstanding of the prin- c iples that
What is a passive activity? A passive activity means the taxpayer does not materially participate. The Test can either be a 100 or 500 hour annual analysis. Any rental activity is a passive activity whether or not the taxpayer materially participates.
a passive activity? A p a s - sive activity means the t a x p a y e r does not ma- terially par-
Maria DeGennaro
Ralph Anderson
drive loss limitations in this area, you will have a good foundation for selecting invest- ment strategies that allow you to take full advantage of the
ticipate. The Test can either be a 100 or 500 hour annual analysis. Any rental activity is a passive activity whether or not the taxpayer materially
sive activities may not be deducted from other active types of income (for example, wages, interest, or dividends, which is considered active
any passive activity in the next succeeding tax year. Any unused suspended losses are allowed in full when the tax- payer disposes of the entire
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