Passive Activity Losses: What You Need to Know
Tax losses are limited in a variety of ways: at-risk limitations, the new business loss limitations imposed by the Tax Cuts and Jobs Act, and business income limitations. Among the most important, and arguably most complex, of these limitations are the passive activity loss limitations found in Internal Revenue Code section 469. This course will explore the parameters of this limitation, when it applies and when it does not, and the various exceptions and ramifications of the passive activity loss rules.
•What activities constitute a passive activity
•How passive activity losses are reported
•When a rental activity is passive and when it is not
•The “small landlord” exception
•Real estate professionals and the passive activity loss rules
•The consequence of disposing of passive activity loss property
- Learn what activities constitute a passive activity
- Learn how passive activity losses are reported
- Learn when a rental activity is passive and when it is not
Tax Shelters in the 1970s 00:02:13
1983 Treasury Department Stats 00:05:52
Purpose of Section 469 00:09:28
Loss Limitations 00:13:15
Passive Activity Defined 00:16:59
Exception for Oil and Gas 00:19:16
“Activity” Defined 00:20:14
“Activity” Defined (cont’d) 00:21:32
Grouping Constraint 1 00:26:16
Grouping Constraint 2 00:34:43
Grouping Constraint 3 00:36:22
Grouping Procedure 00:37:14
Grouping Rules 00:40:38
Material Participation 00:41:27
Seven Material Participation 00:43:38
500 Hours 00:46:10
Substantially All Participation 00:50:36
More Than 100 Hours 00:52:53
Significant Participation Activity 00:54:35
Five Out of Ten Years 00:55:35
3 Years in Personal Service Activity 00:56:57
Limited Partners 01:05:19
NOT Passive Activity Income 01:06:47
Real Estate Professionals 01:07:52
Real Estate Professionals -Requirements 01:09:32
Real Estate Professional Status For Married Taxpayers 01:10:55
Material Participation For Married Taxpayers 01:12:21
Real Property Trades or Businesses 01:14:20
Closely Held C Corporations 01:15:07
Services as an Employee 01:16:18
Passive Activity Defined 01:19:32
Non-Rental Activities 01:20:33
Tuxedo Exception 01:22:14
Hotel Exception 01:22:45
Significant Personal Services 01:23:36
Nursing Home Exception 01:24:41
Segway Exception 01:25:37
Golf Course Exception 01:27:27
Disposition of Entire Interest 01:29:48
§ 267 Related Parties 01:31:59
Family Members 01:32:28
Disposition by Death 01:33:01
Disposition by Installment Sale 01:34:08
Other Rules 01:36:03
Self Rental Rule 01:36:12
Small Landlord Exception 01:38:09
Active Participation Constraint 01:38:53
199A Deduction 01:39:05
The Rental Property Dilemma 01:39:16
Safe Harbor for Rental Property 01:39:32
Safe Harbor Not Applicable 01:40:17
Presentation Closing 01:41:10
- 199A 01:39:08
- Annuities 01:06:55
- At-Risk Rules 00:14:48
- C Corporations 01:15:14
- Dividends 01:06:55
- Form 8582 01:40:42
- Interest 01:06:55
- Limited Partnership 00:03:27, 01:05:19
- Outside Basis 00:13:59
- Royalties 01:06:55
- Safe Harbor 01:39:33
- Schedule E 01:40:42
- S Corporation 00:33:06
- Section 1411 00:01:24
- Section 465 00:14:50
- Section 469 00:01:13, 00:02:20. 00:08:34,00:15:42, 00:41:56
- Tax Cuts and Job Act
- Tax Shelter 00:02:33
199A: 199A allows taxpayers to deduction up to 20% of qualified business income (QBI) from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust, or estate. The Sec. 199A deduction can be taken by individuals and by some estates and trusts
Annuities: An annuity is a series of payments made at equal intervals. Examples of annuities are regular deposits to a savings account, monthly home mortgage payments, monthly insurance payments and pension payments. Annuities can be classified by the frequency of payment dates.
At Risk Rules: At risk rules are special rules that prevent investors from writing off more than the amount they invested in a business, generally a flow-through entity.
C Corporations : A C corporation, under United States federal income tax law, refers to any corporation that is taxed separately from its owners. A C corporation is distinguished from an S corporation, which generally is not taxed separately. Most major companies are treated as C corporations for U.S. federal income tax purposes.
Dividends: A dividend is a payment made by a corporation to its shareholders, usually as a distribution of profits. When a corporation earns a profit or surplus, the corporation is able to re-invest the profit in the business and pay a proportion of the profit as a dividend to shareholders.
Form 8582: Form 8582 is used by noncorporate taxpayers to figure the amount of any passive activity loss (PAL) for the current tax year and to report the application of prior year unallowed PALs.
Interest : Interest is the charge for the privilege of borrowing money, typically expressed as annual percentage rate (APR). Interest can also refer to the amount of ownership a stockholder has in a company, usually expressed as a percentage.
Limited Partnership: A limited partnership is a form of partnership similar to a general partnership except that while a general partnership must have at least two general partners, a limited partnership must have at least one GP and at least one limited partner.
Outside Basis: The outside basis is the tax basis of each individual partner's interest in the partnership. When a partner contributes property to the partnership, the partnership's basis in the contributed property is equal to its fair market value
Royalties: A royalty is a payment made by one party (the licensee or franchisee) to another that owns a particular asset (the licensor or franchisor), for the right to ongoing use of that asset. ... A royalty interest is the right to collect a stream of future royalty payments.
Safe Harbor: A safe harbor is a provision of a statute or a regulation that specifies that certain conduct will be deemed not to violate a given rule. It is usually found in connection with a vaguer, overall standard. Under the safe harbor, a “rental real estate enterprise” is treated as a trade or business for purposes of Sec. 199A if at least 250 hours of services are performed each tax year with respect to the enterprise. ... The safe harbor requires that separate books and records be maintained for the rental real estate enterprise.
Schedule E: Schedule E is used to report income and losses from rental property, and income from trusts, estates, partnerships, and S-corporations. If you're receiving income from any of the pass-through activities, you should receive a Schedule K-1 from the entity.
S Corporation: An S corporation, for United States federal income tax, is a closely held corporation that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. In general, S corporations do not pay any income taxes.
Section 1411: The Net Investment Income Tax is imposed by section 1411 of the Internal Revenue Code. The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts.
Section 465: Under Sec. 465, a taxpayer that engages in certain activities may deduct losses from those activities only to the extent the taxpayer is “at risk” for those activities at the end of the tax year.
Section 469: Under Sec. 469, a taxpayer only may offset losses from a passive activity against income from a passive activity. A passive activity generally includes any trade or business of a taxpayer in which the taxpayer does not materially participate and any rental activities of a taxpayer, regardless of the level of participation.
Tax Cuts and Jobs Act: The Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018, Pub.L. 115–97, is a congressional revenue act of the United States originally introduced in Congress as the Tax Cuts and Jobs Act, that amended the Internal Revenue Code of 1986.
Tax Shelter: A tax shelter is any legal strategy you employ to reduce the amount of income taxes you owe. After receiving much attention in the news in recent years, the term "tax shelter" has a negative connotation relating to deceptive and illegal schemes to evade income tax.
Chuck Borek is a practicing attorney and founder of the Borek Group, LLC. Chuck is also a CPA, and his background includes five years as a partner in a public accounting firm. He received his law degree and MBA summa cum laude from the University of Baltimore in 1993, where he was editor-in-chief of the Law Review. He has been teaching professionally since 1989, including four years as an Associate Professor of Accounting and two years as a Visiting Assistant Professor of Law. He ha... View Full Profile