Discussion:Real Estate Professional and the grouping of rental activities

The RE professional box on each SCH E is checked butI get a critical diagnostic stating that to qualify for the full deduction I have to make an election to treat all rental activities as a single activity which I don't want to do. This is not my understanding of the RE Professional rules. Lacerte could offer me no help on this point even when I pointed out that this diagnostic was not around in 2005. Can anyone help me out there? Thanks

JR, if those losses were suspended passive, the client's election to aggregate did not make it into your computer.

you probably checked the box wrong "did the taxpayer dispose of his entire interest"

Further " even if a taxpayer is a real estate professional he must still meet material participation for each separate rental before losses will be fully deductible" As for material participation rules you only have to meet 1 of the 7 criteria. I find that most RE Professionals qualify under 2. "The individual is the only one who substantially participates in the activity." (see Kevinh5 comment) The critical diagnostic by Lacerte, I conclude, is misleading. You wouldn't want to group activities for the reasons already described.

How do you know when there is a nonpassive loss? Is it when the losses are greater than any income you have on your 1040. Is there a form that shows that carry forward losses. I know there is the form 8582 for passive losses but what about non passive losses that carry forward?

Also, when you sell the home, you say that those losses carry forward are not deductible on the sale and remain to carry forward until there is income to offset the loss or all of the grouped properties are sold. Does this seem correct?

thanks for the info. These are for rental properties and there will be a carry forward loss. What form will show if there are nonpassive loss carryforwards (1045) for the rental losses for a real estate professional??? I understand the answer for question 2.

Warning: Profits by real estate professionals may be taxed as earned income. Restructuring the investment may be easier if an LLC is used.

When you group all of the properties in an LLC, you can still do seperate Schedule Es correct?

I'm running into this issue as well, that the TP would not make the hours requirement because he owns 3 props, unless I aggregate them. Now, it was mentioned above (February posts) that you wouldn't want to aggregate because you would need to dispose of the entire activity to free the losses, not just a single property. My queston is, if you're a R/E pro, what suspended lossses would you have if all losses flow out each year? There seems to be no downside, which is giving me reason to pause and pose this questions. Am I missing something? Any insight would be appreciated.

2) What if he quits real estate?

If he quits real estate, then you are no longer under 469(c)(7), and as I understand it, that election to aggregate no longer applies. Point here is that if at a later date you need these activities separated, I think all he has to do is fail 469(c)(7) in that year.

And I completely see your point. If all is aggregated, all losses flow out anyway, therefore there are no suspended losses, so what's at risk in making the election. Your thought process seems correct to me, and next time I am dealing with this issue, I am going to remember what you said.

I have a question about the grouping election. First, I have no idea what the IRS means by electing in "writing" to group activities. I don't see where on any of the forms that it asks for a box to be checked regarding grouping. Do they just want a letter with the return stating that we are electing to group rental properties.

I especially liked the comments about when a RE professional quits being one. Well, fine, so be it. Back to the $25000 per year rules.

Some comments in this thread about putting all RE properties into one LLC concerns me. I have been taught that you would NEVER do this. The object of the LLC is limiting liability exposure to the assets of the LLC. You only want ONE property in any ONE LLC. If you have three properties in one LLC, then the equity IN EACH OF THE THREE PROPERTIES is available to the liars, I mean lawyers, suing you.

Anyone advising clients to combine multiple properties in ONE LLC should think about this. Some of the comments in this thread suggested that some professionals may be advising their clients to do this.

If you elect to aggregate and then fail to qualify as a RE professional, I don't know if the activities remain aggregated or if they become segregated. On the one hand, the taxpayer is no longer a RE professional, so you would think that the election made under that provision shouldn't matter. On the other hand, you've essentially chosen how you are going to group your activities, and there is a reg that requires consistency in how you group those activities.

Is my thinking flawed?

2) Since the taxpayer did not group the activities in the past, there will be no problem with their grouping unless and until the taxpayer makes a decision to group them. This should not be done without the help of a competent paid professional.

3) "since the activities are now grouped..." Where? When? Why? Your scenerio doesn't show that they need to be or ever were grouped until now.

4) Even if the activies were grouped, in the event of a disposition of one of the properties/sub-activities (but not a full disposition of the entire group/activity), any gain from that disposition would free up an equal amount of previously unallowed losses. The only thing missing is the ability to currently deduct losses in excess of gains. But, until the last two years, how many times has THAT really been a problem? Statistically, it used to happen so rarely that it was only a hypothetical textbook example.

5) 'So, the taxpayer would not even benefit from selling one or two properties to pay the old taxes..." WHAT OLD taxes? There are no 'OLD' taxes. There is only suspended loss. The 'old taxes' have been paid. Or rather, should have been if the taxpayer had been complying with the tax laws correctly

Now I think by 'old taxes' you mean what he got caught cheating the rest of us citizens out of by filing a return claiming improper losses.  Yes, he can still raise cash by selling, or borrowing, as he should to pay his rightful tax bill.

(and don't we all wonder why any 'professional' would want to own 6 LOSING properties?)

Point 1: Honestly, I reviewed one tax return the other day where the T/P owns 10 properties and the prior preparer put the depreciation for all properties on Property #1. Guess what? IRS is auditing the return. Wonder why ???

Other points: Taxpayer did not group until 2008. Went to a seminar which recommended the grouping activity, and so grouped them in 2008. Then asked me my opinion about it.

My thinking above was that if IRS came in and disallowed the prior year losses, i.e. now taxpayer has prior suspended activities, that if the rentals are grouped that UNLESS there is income generated by the group in the form of either rental income or sale of a property, that the suspended losses would remain just that -- as suspended. In this real estate market, I don't know how much income will get generated ..... but to the points above where some stated that there would be no suspended losses to worry about .... that would only be true if you started the grouping from Day 1. In this client's case, not necessarily so.

You are right...by "old taxes" I meant the ones that he may now get caught on -- I mean IRS is hot now on the topic of deducting losses in excess of the $25K ...

He has not been "caught" yet.

If the rentals are all grouped then seems to me the entire disposition would mean all of the properties......the downside I was trying to get to was that if IRS disallowed this guy's losses, and now he has grouped them, that even if he sold a property within the group, that the suspended losses would not be freed up since that property is now part of a group and disposing of one property within the group does not make for an entire disposition of the activity.

I agree with Kevin regarding the partial sale of a former passive activity. Although, PPC does not.

I know this passive stuff is advanced tax law, but I think that the above explanation is basic knowledge for the passive topic. It is one of the first things you learn when you learn passive.

Suppose there was no gain further than that absorbed by the group. Then, the loss from all of the former passive activities (individual properties) still sits there. Therefore, the 'books'/return will still track suspended losses from a property which the taxpayer no longer owns.

Thus the problem way above in this thread.