Internal Revenue Code:Sec. 469. Passive activity losses and credits limited
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Location in Internal Revenue Code
TITLE 26 - INTERNAL REVENUE CODE
Subtitle A - Income Taxes
CHAPTER 1 - NORMAL TAXES AND SURTAXES
Subchapter E - Accounting Periods and Methods of Accounting
PART II - METHODS OF ACCOUNTING
Subpart C - Taxable Year for Which Deductions Taken
Statute
Sec. 469. Passive activity losses and credits limited
(a) Disallowance
(1) In general
If for any taxable year the taxpayer is described in paragraph
(2), neither -
(A) the passive activity loss, nor
(B) the passive activity credit,
for the taxable year shall be allowed.
(2) Persons described
The following are described in this paragraph:
(A) any individual, estate, or trust,
(B) any closely held C corporation, and
(C) any personal service corporation.
(b) Disallowed loss or credit carried to next year
Except as otherwise provided in this section, any loss or credit
from an activity which is disallowed under subsection (a) shall be
treated as a deduction or credit allocable to such activity in the
next taxable year.
(c) Passive activity defined
For purposes of this section -
(1) In general
The term ''passive activity'' means any activity -
(A) which involves the conduct of any trade or business, and
(B) in which the taxpayer does not materially participate.
(2) Passive activity includes any rental activity
Except as provided in paragraph (7), the term ''passive
activity'' includes any rental activity.
(3) Working interests in oil and gas property
(A) In general
The term ''passive activity'' shall not include any working
interest in any oil or gas property which the taxpayer holds
directly or through an entity which does not limit the
liability of the taxpayer with respect to such interest.
(B) Income in subsequent years
If any taxpayer has any loss for any taxable year from a
working interest in any oil or gas property which is treated as
a loss which is not from a passive activity, then any net
income from such property (or any property the basis of which
is determined in whole or in part by reference to the basis of
such property) for any succeeding taxable year shall be treated
as income of the taxpayer which is not from a passive
activity. If the preceding sentence applies to the net income
from any property for any taxable year, any credits allowable
under subpart B (other than section 27(a)) or D of part IV of
subchapter A for such taxable year which are attributable to
such property shall be treated as credits not from a passive
activity to the extent the amount of such credits does not
exceed the regular tax liability of the taxpayer for the
taxable year which is allocable to such net income.
(4) Material participation not required for paragraphs (2) and
(3)
Paragraphs (2) and (3) shall be applied without regard to
whether or not the taxpayer materially participates in the
activity.
(5) Trade or business includes research and experimentation
activity
For purposes of paragraph (1)(A), the term ''trade or
business'' includes any activity involving research or
experimentation (within the meaning of section 174).
(6) Activity in connection with trade or business or production
of income
To the extent provided in regulations, for purposes of
paragraph (1)(A), the term ''trade or business'' includes -
(A) any activity in connection with a trade or business, or
(B) any activity with respect to which expenses are allowable
as a deduction under section 212.
(7) Special rules for taxpayers in real property business
(A) In general
If this paragraph applies to any taxpayer for a taxable year
-
(i) paragraph (2) shall not apply to any rental real estate
activity of such taxpayer for such taxable year, and
(ii) this section shall be applied as if each interest of
the taxpayer in rental real estate were a separate activity.
Notwithstanding clause (ii), a taxpayer may elect to treat all
interests in rental real estate as one activity. Nothing in
the preceding provisions of this subparagraph shall be
construed as affecting the determination of whether the
taxpayer materially participates with respect to any interest
in a limited partnership as a limited partner.
(B) Taxpayers to whom paragraph applies
This paragraph shall apply to a taxpayer for a taxable year
if -
(i) more than one-half of the personal services performed
in trades or businesses by the taxpayer during such taxable
year are performed in real property trades or businesses in
which the taxpayer materially participates, and
(ii) such taxpayer performs more than 750 hours of services
during the taxable year in real property trades or businesses
in which the taxpayer materially participates.
In the case of a joint return, the requirements of the
preceding sentence are satisfied if and only if either spouse
separately satisfies such requirements. For purposes of the
preceding sentence, activities in which a spouse materially
participates shall be determined under subsection (h).
(C) Real property trade or business
For purposes of this paragraph, the term ''real property
trade or business'' means any real property development,
redevelopment, construction, reconstruction, acquisition,
conversion, rental, operation, management, leasing, or
brokerage trade or business.
(D) Special rules for subparagraph (B)
(i) Closely held C corporations
In the case of a closely held C corporation, the
requirements of subparagraph (B) shall be treated as met for
any taxable year if more than 50 percent of the gross
receipts of such corporation for such taxable year are
derived from real property trades or businesses in which the
corporation materially participates.
(ii) Personal services as an employee
For purposes of subparagraph (B), personal services
performed as an employee shall not be treated as performed in
real property trades or businesses. The preceding sentence
shall not apply if such employee is a 5-percent owner (as
defined in section 416(i)(1)(B)) in the employer.
(d) Passive activity loss and credit defined
For purposes of this section -
(1) Passive activity loss
The term ''passive activity loss'' means the amount (if any) by
which -
(A) the aggregate losses from all passive activities for the
taxable year, exceed
(B) the aggregate income from all passive activities for such
year.
(2) Passive activity credit
The term ''passive activity credit'' means the amount (if any)
by which -
(A) the sum of the credits from all passive activities
allowable for the taxable year under -
(i) subpart D of part IV of subchapter A, or
(ii) subpart B (other than section 27(a)) of such part IV,
exceeds
(B) the regular tax liability of the taxpayer for the taxable
year allocable to all passive activities.
(e) Special rules for determining income or loss from a passive
activity
For purposes of this section -
(1) Certain income not treated as income from passive activity
In determining the income or loss from any activity -
(A) In general
There shall not be taken into account -
(i) any -
(I) gross income from interest, dividends, annuities, or
royalties not derived in the ordinary course of a trade or
business,
(II) expenses (other than interest) which are clearly and
directly allocable to such gross income, and
(III) interest expense properly allocable to such gross
income, and
(ii) gain or loss not derived in the ordinary course of a
trade or business which is attributable to the disposition of
property -
(I) producing income of a type described in clause (i),
or
(II) held for investment.
For purposes of clause (ii), any interest in a passive activity
shall not be treated as property held for investment.
(B) Return on working capital
For purposes of subparagraph (A), any income, gain, or loss
which is attributable to an investment of working capital shall
be treated as not derived in the ordinary course of a trade or
business.
(2) Passive losses of certain closely held corporations may
offset active income
(A) In general
If a closely held C corporation (other than a personal
service corporation) has net active income for any taxable
year, the passive activity loss of such taxpayer for such
taxable year (determined without regard to this paragraph) -
(i) shall be allowable as a deduction against net active
income, and
(ii) shall not be taken into account under subsection (a)
to the extent so allowable as a deduction.
A similar rule shall apply in the case of any passive activity
credit of the taxpayer.
(B) Net active income
For purposes of this paragraph, the term ''net active
income'' means the taxable income of the taxpayer for the
taxable year determined without regard to -
(i) any income or loss from a passive activity, and
(ii) any item of gross income, expense, gain, or loss
described in paragraph (1)(A).
(3) Compensation for personal services
Earned income (within the meaning of section 911(d)(2)(A))
shall not be taken into account in computing the income or loss
from a passive activity for any taxable year.
(4) Dividends reduced by dividends received deduction
For purposes of paragraphs (1) and (2), income from dividends
shall be reduced by the amount of any dividends received
deduction under section 243, 244, or 245.
(f) Treatment of former passive activities
For purposes of this section -
(1) In general
If an activity is a former passive activity for any taxable
year -
(A) any unused deduction allocable to such activity under
subsection (b) shall be offset against the income from such
activity for the taxable year,
(B) any unused credit allocable to such activity under
subsection (b) shall be offset against the regular tax
liability (computed after the application of paragraph (1))
allocable to such activity for the taxable year, and
(C) any such deduction or credit remaining after the
application of subparagraphs (A) and (B) shall continue to be
treated as arising from a passive activity.
(2) Change in status of closely held C corporation or personal
service corporation
If a taxpayer ceases for any taxable year to be a closely held
C corporation or personal service corporation, this section shall
continue to apply to losses and credits to which this section
applied for any preceding taxable year in the same manner as if
such taxpayer continued to be a closely held C corporation or
personal service corporation, whichever is applicable.
(3) Former passive activity
The term ''former passive activity'' means any activity which,
with respect to the taxpayer -
(A) is not a passive activity for the taxable year, but
(B) was a passive activity for any prior taxable year.
(g) Dispositions of entire interest in passive activity
If during the taxable year a taxpayer disposes of his entire
interest in any passive activity (or former passive activity), the
following rules shall apply:
(1) Fully taxable transaction
(A) In general
If all gain or loss realized on such disposition is
recognized, the excess of -
(i) any loss from such activity for such taxable year
(determined after the application of subsection (b)), over
(ii) any net income or gain for such taxable year from all
other passive activities (determined after the application of
subsection (b)),
shall be treated as a loss which is not from a passive
activity.
(B) Subparagraph (A) not to apply to disposition involving
related party
If the taxpayer and the person acquiring the interest bear a
relationship to each other described in section 267(b) or
section 707(b)(1), then subparagraph (A) shall not apply to any
loss of the taxpayer until the taxable year in which such
interest is acquired (in a transaction described in
subparagraph (A)) by another person who does not bear such a
relationship to the taxpayer.
(C) Income from prior years
To the extent provided in regulations, income or gain from
the activity for preceding taxable years shall be taken into
account under subparagraph (A)(ii) for the taxable year to the
extent necessary to prevent the avoidance of this section.
(2) Disposition by death
If an interest in the activity is transferred by reason of the
death of the taxpayer -
(A) paragraph (1)(A) shall apply to losses described in
paragraph (1)(A) to the extent such losses are greater than the
excess (if any) of -
(i) the basis of such property in the hands of the
transferee, over
(ii) the adjusted basis of such property immediately before
the death of the taxpayer, and
(B) any losses to the extent of the excess described in
subparagraph (A) shall not be allowed as a deduction for any
taxable year.
(3) Installment sale of entire interest
In the case of an installment sale of an entire interest in an
activity to which section 453 applies, paragraph (1) shall apply
to the portion of such losses for each taxable year which bears
the same ratio to all such losses as the gain recognized on such
sale during such taxable year bears to the gross profit from such
sale (realized or to be realized when payment is completed).
(h) Material participation defined
For purposes of this section -
(1) In general
A taxpayer shall be treated as materially participating in an
activity only if the taxpayer is involved in the operations of
the activity on a basis which is -
(A) regular,
(B) continuous, and
(C) substantial.
(2) Interests in limited partnerships
Except as provided in regulations, no interest in a limited
partnership as a limited partner shall be treated as an interest
with respect to which a taxpayer materially participates.
(3) Treatment of certain retired individuals and surviving
spouses
A taxpayer shall be treated as materially participating in any
farming activity for a taxable year if paragraph (4) or (5) of
section 2032A(b) would cause the requirements of section
2032A(b)(1)(C)(ii) to be met with respect to real property used
in such activity if such taxpayer had died during the taxable
year.
(4) Certain closely held C corporations and personal service
corporations
A closely held C corporation or personal service corporation
shall be treated as materially participating in an activity only
if -
(A) 1 or more shareholders holding stock representing more
than 50 percent (by value) of the outstanding stock of such
corporation materially participate in such activity, or
(B) in the case of a closely held C corporation (other than a
personal service corporation), the requirements of section
465(c)(7)(C) (without regard to clause (iv)) are met with
respect to such activity.
(5) Participation by spouse
In determining whether a taxpayer materially participates, the
participation of the spouse of the taxpayer shall be taken into
account.
(i) $25,000 offset for rental real estate activities
(1) In general
In the case of any natural person, subsection (a) shall not
apply to that portion of the passive activity loss or the
deduction equivalent (within the meaning of subsection (j)(5)) of
the passive activity credit for any taxable year which is
attributable to all rental real estate activities with respect to
which such individual actively participated in such taxable year
(and if any portion of such loss or credit arose in another
taxable year, in such other taxable year).
(2) Dollar limitation
The aggregate amount to which paragraph (1) applies for any
taxable year shall not exceed $25,000.
(3) Phase-out of exemption
(A) In general
In the case of any taxpayer, the $25,000 amount under
paragraph (2) shall be reduced (but not below zero) by 50
percent of the amount by which the adjusted gross income of the
taxpayer for the taxable year exceeds $100,000.
(B) Special phase-out of rehabilitation credit
In the case of any portion of the passive activity credit for
any taxable year which is attributable to the rehabilitation
credit determined under section 47, subparagraph (A) shall be
applied by substituting ''$200,000'' for ''$100,000''.
(C) Exception for commercial revitalization deduction
Subparagraph (A) shall not apply to any portion of the
passive activity loss for any taxable year which is
attributable to the commercial revitalization deduction under
section 1400I.
(D) Exception for low-income housing credit
Subparagraph (A) shall not apply to any portion of the
passive activity credit for any taxable year which is
attributable to any credit determined under section 42.
(E) Ordering rules to reflect exceptions and separate
phase-outs
If subparagraph (B), (C), or (D) applies for a taxable year,
paragraph (1) shall be applied -
(i) first to the portion of the passive activity loss to
which subparagraph (C) does not apply,
`(ii) second to the portion of such loss to
which subparagraph (C) applies,
(iii) third to the portion of the passive
activity credit to which subparagraph (B) or (D)
does not apply,
(iv) fourth to the portion of such credit to
which subparagraph (B) applies, and''.
(v) then to the portion of such credit to which
subparagraph (D) applies.
(F) Adjusted gross income
For purposes of this paragraph, adjusted gross income shall
be determined without regard to -
(i) any amount includible in gross income under section 86,
(ii) the amounts excludable from gross income under
sections 135 and 137,
(iii) the amounts allowable as a deduction under sections
199, 219, 221, and 222, and
(iv) any passive activity loss or any loss allowable by
reason of subsection (c)(7).
(4) Special rule for estates
(A) In general
In the case of taxable years of an estate ending less than 2
years after the date of the death of the decedent, this
subsection shall apply to all rental real estate activities
with respect to which such decedent actively participated
before his death.
(B) Reduction for surviving spouse's exemption
For purposes of subparagraph (A), the $25,000 amount under
paragraph (2) shall be reduced by the amount of the exemption
under paragraph (1) (without regard to paragraph (3)) allowable
to the surviving spouse of the decedent for the taxable year
ending with or within the taxable year of the estate.
(5) Married individuals filing separately
(A) In general
Except as provided in subparagraph (B), in the case of any
married individual filing a separate return, this subsection
shall be applied by substituting -
(i) ''$12,500'' for ''$25,000'' each place it appears,
(ii) ''$50,000'' for ''$100,000'' in paragraph (3)(A), and
(iii) ''$100,000'' for ''$200,000'' in paragraph (3)(B).
(B) Taxpayers not living apart
This subsection shall not apply to a taxpayer who -
(i) is a married individual filing a separate return for
any taxable year, and
(ii) does not live apart from his spouse at all times
during such taxable year.
(6) Active participation
(A) In general
An individual shall not be treated as actively participating
with respect to any interest in any rental real estate activity
for any period if, at any time during such period, such
interest (including any interest of the spouse of the
individual) is less than 10 percent (by value) of all interests
in such activity.
(B) No participation requirement for low-income housing,
rehabilitation credit, or commercial revitalization
deduction
Paragraphs (1) and (4)(A) shall be applied without regard to
the active participation requirement in the case of -
(i) any credit determined under section 42 for any taxable
year,
(ii) any rehabilitation credit determined under section 47,
or
(iii) any deduction under section 1400I (relating to
commercial revitalization deduction).
(C) Interest as a limited partner
Except as provided in regulations, no interest as a limited
partner in a limited partnership shall be treated as an
interest with respect to which the taxpayer actively
participates.
(D) Participation by spouse
In determining whether a taxpayer actively participates, the
participation of the spouse of the taxpayer shall be taken into
account.
(j) Other definitions and special rules
For purposes of this section -
(1) Closely held C corporation
The term ''closely held C corporation'' means any C corporation
described in section 465(a)(1)(B).
(2) Personal service corporation
The term ''personal service corporation'' has the meaning given
such term by section 269A(b)(1), except that section 269A(b)(2)
shall be applied -
(A) by substituting ''any'' for ''more than 10 percent'', and
(B) by substituting ''any'' for ''50 percent or more in
value'' in section 318(a)(2)(C).
A corporation shall not be treated as a personal service
corporation unless more than 10 percent of the stock (by value)
in such corporation is held by employee-owners (within the
meaning of section 269A(b)(2), as modified by the preceding
sentence).
(3) Regular tax liability
The term ''regular tax liability'' has the meaning given such
term by section 26(b).
(4) Allocation of passive activity loss and credit
The passive activity loss and the passive activity credit (and
the $25,000 amount under subsection (i)) shall be allocated to
activities, and within activities, on a pro rata basis in such
manner as the Secretary may prescribe.
(5) Deduction equivalent
The deduction equivalent of credits from a passive activity for
any taxable year is the amount which (if allowed as a deduction)
would reduce the regular tax liability for such taxable year by
an amount equal to such credits.
(6) Special rule for gifts
In the case of a disposition of any interest in a passive
activity by gift -
(A) the basis of such interest immediately before the
transfer shall be increased by the amount of any passive
activity losses allocable to such interest with respect to
which a deduction has not been allowed by reason of subsection
(a), and
(B) such losses shall not be allowable as a deduction for any
taxable year.
(7) Qualified residence interest
The passive activity loss of a taxpayer shall be computed
without regard to qualified residence interest (within the
meaning of section 163(h)(3)).
(8) Rental activity
The term ''rental activity'' means any activity where payments
are principally for the use of tangible property.
(9) Election to increase basis of property by amount of
disallowed credit
For purposes of determining gain or loss from a disposition of
any property to which subsection (g)(1) applies, the transferor
may elect to increase the basis of such property immediately
before the transfer by an amount equal to the portion of any
unused credit allowable under this chapter which reduced the
basis of such property for the taxable year in which such credit
arose. If the taxpayer elects the application of this paragraph,
such portion of the passive activity credit of such taxpayer
shall not be allowed for any taxable year.
(10) Coordination with section 280A
If a passive activity involves the use of a dwelling unit to
which section 280A(c)(5) applies for any taxable year, any
income, deduction, gain, or loss allocable to such use shall not
be taken into account for purposes of this section for such
taxable year.
(11) Aggregation of members of affiliated groups
Except as provided in regulations, all members of an affiliated
group which files a consolidated return shall be treated as 1
corporation.
(12) Special rule for distributions by estates or trusts
If any interest in a passive activity is distributed by an
estate or trust -
(A) the basis of such interest immediately before such
distribution shall be increased by the amount of any passive
activity losses allocable to such interest, and
(B) such losses shall not be allowable as a deduction for any
taxable year.
(k) Separate application of section in case of publicly traded
partnerships
(1) In general
This section shall be applied separately with respect to items
attributable to each publicly traded partnership (and subsection
(i) shall not apply with respect to items attributable to any
such partnership). The preceding sentence shall not apply to any
credit determined under section 42, or any rehabilitation credit
determined under section 47, attributable to a publicly traded
partnership to the extent the amount of any such credits exceeds
the regular tax liability attributable to income from such
partnership.
(2) Publicly traded partnership
For purposes of this section, the term ''publicly traded
partnership'' means any partnership if -
(A) interests in such partnership are traded on an
established securities market, or
(B) interests in such partnership are readily tradable on a
secondary market (or the substantial equivalent thereof).
(3) Coordination with subsection (g)
For purposes of subsection (g), a taxpayer shall not be treated
as having disposed of his entire interest in an activity of a
publicly traded partnership until he disposes of his entire
interest in such partnership.
(4) Application to regulated investment companies.--For
purposes of this section, a regulated investment company (as
defined in section 851) holding an interest in a qualified
publicly traded partnership (as defined in section 851(h)) shall
be treated as a taxpayer described in subsection (a)(2) with
respect to items attributable to such interest.
(l) Regulations
The Secretary shall prescribe such regulations as may be
necessary or appropriate to carry out provisions of this section,
including regulations -
(1) which specify what constitutes an activity, material
participation, or active participation for purposes of this
section,
(2) which provide that certain items of gross income will not
be taken into account in determining income or loss from any
activity (and the treatment of expenses allocable to such
income),
(3) requiring net income or gain from a limited partnership or
other passive activity to be treated as not from a passive
activity,
(4) which provide for the determination of the allocation of
interest expense for purposes of this section, and
(5) which deal with changes in marital status and changes
between joint returns and separate returns.
(m) Phase-in of disallowance of losses and credits for interest
held before date of enactment
(1) In general
In the case of any passive activity loss or passive activity
credit for any taxable year beginning in calendar years 1987
through 1990, subsection (a) shall not apply to the applicable
percentage of that portion of such loss (or such credit) which is
attributable to pre-enactment interests.
(2) Applicable percentage
For purposes of this subsection, the applicable percentage
shall be determined in accordance with the following table:
---------------------------------------------------------------------
In the case of taxable years The applicable percentage is:
beginning in:
---------------------------------------------------------------------
1987 65
1988 40
1989 20
1990 10.
-------------------------------
(3) Portion of loss or credit attributable to pre-enactment
interests
For purposes of this subsection -
(A) In general
The portion of the passive activity loss (or passive activity
credit) for any taxable year which is attributable to
pre-enactment interests is the lesser of -
(i) the amount of the passive activity loss (or passive
activity credit) which is disallowed for the taxable year
under subsection (a) (without regard to this subsection), or
(ii) the amount of the passive activity loss (or passive
activity credit) which would be disallowed for the taxable
year (without regard to this subsection and without regard to
any amount allocable to an activity for the taxable year
under subsection (b)) taking into account only pre-enactment
interests.
(B) Pre-enactment interest
(i) In general
The term ''pre-enactment interest'' means any interest in a
passive activity held by a taxpayer on the date of the
enactment of the Tax Reform Act of 1986, and at all times
thereafter.
(ii) Binding contract exception
For purposes of clause (i), any interest acquired after
such date of enactment pursuant to a written binding contract
in effect on such date, and at all times thereafter, shall be
treated as held on such date.
(iii) Interest in activities
The term ''pre-enactment interest'' shall not include an
interest in a passive activity unless such activity was being
conducted on such date of enactment. The preceding sentence
shall not apply to an activity commencing after such date if
-
(I) the property used in such activity is acquired
pursuant to a written binding contract in effect on August
16, 1986, and at all times thereafter, or
(II) construction of property used in such activity began
on or before August 16, 1986.
Sources
(Added Pub. L. 99-514, title V, Sec. 501(a), Oct. 22, 1986, 100
Stat. 2233; amended Pub. L. 100-203, title X, Sec. 10212(a), Dec.
22, 1987, 101 Stat. 1330-405; Pub. L. 100-647, title I, Sec.
1005(a)(1)-(9), (11), (12), title II, Sec. 2004(g), title VI, Sec.
6009(c)(3), Nov. 10, 1988, 102 Stat. 3387-3389, 3603, 3690; Pub. L.
101-239, title VII, Sec. 7109(a), Dec. 19, 1989, 103 Stat. 2322;
Pub. L. 101-508, title XI, Sec. 11704(a)(6), 11813(b)(16), Nov. 5,
1990, 104 Stat. 1388-518, 1388-555; Pub. L. 103-66, title XIII,
Sec. 13143(a), (b), Aug. 10, 1993, 107 Stat. 440, 441; Pub. L.
104-188, title I, Sec. 1704(d)(1), (e)(1), 1807(c)(4), Aug. 20,
1996, 110 Stat. 1878, 1902; Pub. L. 105-277, div. J, title IV,
Sec. 4003(a)(2)(D), Oct. 21, 1998, 112 Stat. 2681-908; Pub. L.
106-554, Sec. 1(a)(7) (title I, Sec. 101(b)), Dec. 21, 2000, 114
Stat. 2763, 2763A-599; Pub. L. 107-16, title IV, Sec. 431(c)(3),
June 7, 2001, 115 Stat. 68.)
Amendment of Section
AMENDMENT OF SECTION
For termination of amendment by section 901 of Pub. L. 107-16,
see Effective and Termination Dates of 2001 Amendment note below.
References in Text
REFERENCES IN TEXT
The date of the enactment of the Tax Reform Act of 1986, referred
to in subsec. (m)(3)(B), is the date of enactment of Pub. L.
99-514, which was approved Oct. 22, 1986.
Miscellaneous
AMENDMENTS
2004 - Pub. L. 108-357, Sec.331(g). Subsection (k) of section 469
(relating to separate application of section in case of publicly
traded partnerships) is amended by adding at the end the following
new paragraph: (4) Application to regulated investment companies.
Effective Date.--The <<NOTE: 26 USC 469 note.>> amendments made
by this section shall apply to taxable years beginning after the
date of the enactment of this Act.
2002 - Subsec.412(a), Pub. L. 107-147, amends Sec. 469(i)
(3)(E)(ii), (iii), and (iv).
2001 - Subsec. (i)(3)(F)(iii). Pub. L. 107-16, Sec. 431(c)(3),
901, temporarily substituted '', 221, and 222'' for ''and 221''.
See Effective and Termination Dates of 2001 Amendment note below.
2000 - Subsec. (i)(3)(C) to (F). Pub. L. 106-554, Sec. 1(a)(7)
(title I, Sec. 101(b)(1), (2)), added subpar. (C), redesignated
former subpars. (C) to (E) as (D) to (F), respectively, and
generally amended heading and text of subpar. (E), as
redesignated. Prior to amendment, text read as follows: ''If
subparagraph (B) or (C) applies for any taxable year, paragraph (1)
shall be applied -
''(i) first to the passive activity loss,
''(ii) second to the portion of the passive activity credit to
which subparagraph (B) or (C) does not apply,
''(iii) third to the portion of such credit to which
subparagraph (B) applies, and
''(iv) then to the portion of such credit to which subparagraph
(C) applies.''
Subsec. (i)(6)(B). Pub. L. 106-554, Sec. 1(a)(7) (title I, Sec.
101(b)(3)(B)), substituted '', rehabilitation credit, or commercial
revitalization deduction'' for ''or rehabilitation credit'' in
heading.
Subsec. (i)(6)(B)(iii). Pub. L. 106-554, Sec. 1(a)(7) (title I,
Sec. 101(b)(3)(A)), added cl. (iii).
1998 - Subsec. (i)(3)(E)(iii). Pub. L. 105-277 amended cl. (iii)
generally. Prior to amendment, cl. (iii) read as follows: ''any
amount allowable as a deduction under section 219, and''.
1996 - Subsec. (c)(3)(B). Pub. L. 104-188, Sec. 1704(d)(1),
inserted at end ''If the preceding sentence applies to the net
income from any property for any taxable year, any credits
allowable under subpart B (other than section 27(a)) or D of part
IV of subchapter A for such taxable year which are attributable to
such property shall be treated as credits not from a passive
activity to the extent the amount of such credits does not exceed
the regular tax liability of the taxpayer for the taxable year
which is allocable to such net income.''
Subsec. (g)(1)(A). Pub. L. 104-188, Sec. 1704(e)(1), reenacted
heading without change and amended text generally. Prior to
amendment, text read as follows: ''If all gain or loss realized on
such disposition is recognized, the excess of -
''(i) the sum of -
''(I) any loss from such activity for such taxable year
(determined after application of subsection (b)), plus
''(II) any loss realized on such disposition, over
''(ii) net income or gain for such taxable year from all
passive activities (determined without regard to losses described
in clause (i)),
shall be treated as a loss which is not from a passive activity.''
Subsec. (i)(3)(E)(ii). Pub. L. 104-188, Sec. 1807(c)(4), amended
cl. (ii) generally. Prior to amendment, cl. (ii) read as follows:
''the amount excludable from gross income under section 135,''.
1993 - Subsec. (c)(2). Pub. L. 103-66, Sec. 13143(b)(1),
substituted ''Except as provided in paragraph (7), the'' for
''The''.
Subsec. (c)(7). Pub. L. 103-66, Sec. 13143(a), added par. (7).
Subsec. (i)(3)(E)(iv). Pub. L. 103-66, Sec. 13143(b)(2), inserted
''or any loss allowable by reason of subsection (c)(7)'' after
''loss''.
1990 - Subsec. (i)(3)(B), (6)(B)(ii). Pub. L. 101-508, Sec.
11813(b)(16)(A), substituted ''rehabilitation credit determined
under section 47'' for ''rehabilitation investment credit (within
the meaning of section 48(o))''.
Subsec. (k)(1). Pub. L. 101-508, Sec. 11813(b)(16)(B),
substituted ''rehabilitation credit determined under section 47''
for ''rehabilitation investment credit (within the meaning of
section 48(o))''.
Subsec. (m)(3)(A). Pub. L. 101-508, Sec. 11704(a)(6), substituted
''pre-enactment'' for ''preenactment''.
1989 - Subsec. (i)(3)(B), (C). Pub. L. 101-239 added subpars. (B)
and (C) and struck out former subpars. (B) and (C) which read as
follows:
''(B) Special phase-out of low-income housing and rehabilitation
credits. - In the case of any portion of the passive activity
credit for any taxable year which is attributable to any credit to
which paragraph (6)(B) applies, subparagraph (A) shall be applied
by substituting '$200,000' for '$100,000'.
''(C) Ordering rule to reflect separate phase-outs. - If
subparagraph (B) applies for any taxable year, paragraph (1) shall
be applied -
''(i) first to the passive activity loss,
''(ii) second to the portion of the passive activity credit to
which subparagraph (B) does not apply, and
''(iii) then to the portion of such credit to which
subparagraph (B) applies.''
Subsec. (i)(3)(D), (E). Pub. L. 101-239 added subpar. (D) and
redesignated former subpar. (D) as (E).
1988 - Subsec. (e)(1)(A)(ii). Pub. L. 100-647, Sec. 1005(a)(1),
inserted ''not derived in the ordinary course of a trade or
business which is'' after ''gain or loss''.
Subsec. (g)(1)(A). Pub. L. 100-647, Sec. 1005(a)(2)(A), amended
subpar. (A) generally. Prior to amendment, subpar. (A) read as
follows: ''If all gain or loss realized on such disposition is
recognized, any loss from such activity which has not previously
been allowed as a deduction (and in the case of a passive activity
for the taxable year, any loss realized on such disposition) shall
not be treated as a passive activity loss and shall be allowable as
a deduction against income in the following order:
''(i) Income or gain from the passive activity for the taxable
year (including any gain recognized on the disposition).
''(ii) Net income or gain for the taxable year from all passive
activities.
''(iii) Any other income or gain.''
Subsec. (g)(1)(C). Pub. L. 100-647, Sec. 1005(a)(2)(B),
substituted ''Income from prior years'' for ''Coordination with
section 1211'' in heading and amended text generally. Prior to
amendment, text read as follows: ''In the case of any loss realized
on the disposition of an interest in a passive activity, section
1211 shall be applied before subparagraph (A) is applied.''
Subsec. (g)(2)(A). Pub. L. 100-647, Sec. 1005(a)(3), substituted
''paragraph (1)(A)'' for ''paragraph (1)'' and ''to losses
described in paragraph (1)(A)'' for ''to such losses''.
Subsec. (g)(3). Pub. L. 100-647, Sec. 1005(a)(4), substituted
''(realized or to be realized'' for ''realized (or to be
realized)'' and ''is completed)'' for ''is completed''.
Subsec. (h)(4). Pub. L. 100-647, Sec. 1005(a)(5), inserted
''only'' before ''if''.
Subsec. (i)(1). Pub. L. 100-647, Sec. 1005(a)(6), substituted
''in such taxable year (and if any portion of such loss or credit
arose in another taxable year, in such other taxable year)'' for
''in the taxable year in which such portion of such loss or credit
arose''.
Subsec. (i)(3)(D). Pub. L. 100-647, Sec. 6009(c)(3), added cl.
(ii) and redesignated former cls. (ii) and (iii) as (iii) and (iv),
respectively.
Subsec. (i)(6)(C). Pub. L. 100-647, Sec. 1005(a)(7), substituted
''Except as provided in regulations, no'' for ''No''.
Subsec. (j)(6)(A). Pub. L. 100-647, Sec. 1005(a)(8), inserted
''with respect to which a deduction has not been allowed by reason
of subsection (a)'' after ''to such interest''.
Subsec. (j)(10), (11). Pub. L. 100-647, Sec. 1005(a)(9), added
pars. (10) and (11).
Subsec. (j)(12). Pub. L. 100-647, Sec. 1005(a)(11), added par.
(12).
Subsec. (k)(3). Pub. L. 100-647, Sec. 2004(g), added par. (3).
Subsec. (m). Pub. L. 100-647, Sec. 1005(a)(12), substituted
''interest'' for ''interests'' in heading.
Subsec. (m)(1). Pub. L. 100-647, Sec. 1005(a)(12), added par. (1)
and struck out former par. (1) which read as follows: ''In the case
of any passive activity loss or credit for any taxable year
beginning in calendar years 1987 through 1990 which -
''(A) is attributable to a pre-enactment interest, but
''(B) is not attributable to a carryforward to such taxable
year of any loss or credit which was disallowed under this
section for a preceding taxable year,
there shall be disallowed under subsection (a) only the applicable
percentage of the amount which (but for this subsection) would have
been disallowed under subsection (a) for such taxable year.''
Subsec. (m)(2). Pub. L. 100-647, Sec. 1005(a)(12), added par. (2)
and struck out former par. (2) which resulted in substituting
''65'', ''40'', ''20'', and ''10'' for ''35'', ''60'', ''80'', and
''90'' respectively, in second column.
Subsec. (m)(3)(A). Pub. L. 100-647, Sec. 1005(a)(12), added
subpar. (A) and struck out former subpar. (A) which read as
follows: ''The portion of the passive activity loss for any taxable
year which is attributable to pre-enactment interests shall be
equal to the lesser of -
''(i) the passive activity loss for such taxable year, or
''(ii) the passive activity loss for such taxable year
determined by taking into account only pre-enactment interests.
For purposes of this subparagraph, the deduction equivalent (within
the meaning of subsection (j)(5)) of a passive activity credit
shall be taken into account.''
1987 - Subsecs. (k) to (m). Pub. L. 100-203 added subsec. (k) and
redesignated former subsecs. (k) and (l) as (l) and (m),
respectively.
EFFECTIVE AND TERMINATION DATES OF 2001 AMENDMENT
Amendment by Pub. L. 107-16 applicable to payments made in
taxable years beginning after Dec. 31, 2001, see section 431(d) of
Pub. L. 107-16, set out as a note under section 62 of this title.
Amendment by Pub. L. 107-16 inapplicable to taxable, plan, or
limitation years beginning after Dec. 31, 2010, and the Internal
Revenue Code of 1986 to be applied and administered to such years
as if such amendment had never been enacted, see section 901 of
Pub. L. 107-16, set out as a note under section 1 of this title.
EFFECTIVE DATE OF 1998 AMENDMENT
Amendment by Pub. L. 105-277 effective as if included in the
provision of the Taxpayer Relief Act of 1997, Pub. L. 105-34, to
which such amendment relates, see section 4003(l) of Pub. L.
105-277, set out as a note under section 86 of this title.
EFFECTIVE DATE OF 1996 AMENDMENT
Section 1704(d)(2) of Pub. L. 104-188 provided that: ''The
amendment made by paragraph (1) (amending this section) shall apply
to taxable years beginning after December 31, 1986.''
Section 1704(e)(2) of Pub. L. 104-188 provided that: ''The
amendment made by paragraph (1) (amending this section) shall apply
to taxable years beginning after December 31, 1986.''
Amendment by section 1807(c)(4) of Pub. L. 104-188 applicable to
taxable years beginning after Dec. 31, 1996, see section 1807(e) of
Pub. L. 104-188, set out as an Effective Date note under section 23
of this title.
EFFECTIVE DATE OF 1993 AMENDMENT
Section 13143(c) of Pub. L. 103-66 provided that: ''The
amendments made by this section (amending this section) shall apply
to taxable years beginning after December 31, 1993.''
EFFECTIVE DATE OF 1990 AMENDMENT
Amendment by section 11813(b)(16) of Pub. L. 101-508 applicable
to property placed in service after Dec. 31, 1990, but not
applicable to any transition property (as defined in section 49(e)
of this title), any property with respect to which qualified
progress expenditures were previously taken into account under
section 46(d) of this title, and any property described in section
46(b)(2)(C) of this title, as such sections were in effect on Nov.
4, 1990, see section 11813(c) of Pub. L. 101-508, set out as a note
under section 29 of this title.
EFFECTIVE DATE OF 1989 AMENDMENT
Section 7109(b) of Pub. L. 101-239 provided that:
''(1) In general. - Except as provided in paragraph (2), the
amendments made by this section (amending this section) shall apply
to property placed in service after December 31, 1989, in taxable
years ending after such date.
''(2) Special rule where interest held in pass-thru entity. - In
the case of a taxpayer who holds an indirect interest in property
described in paragraph (1), the amendments made by this section
shall apply only if such interest is acquired after December 31,
1989.''
EFFECTIVE DATE OF 1988 AMENDMENT
Amendment by section 1005(a)(1)-(9), (11), (12) of Pub. L.
100-647 effective, except as otherwise provided, as if included in
the provision of the Tax Reform Act of 1986, Pub. L. 99-514, to
which such amendment relates, see section 1019(a) of Pub. L.
100-647, set out as a note under section 1 of this title.
Amendment by section 2004(g) of Pub. L. 100-647 effective, except
as otherwise provided, as if included in the provisions of the
Revenue Act of 1987, Pub. L. 100-203, title X, to which such
amendment relates, see section 2004(u) of Pub. L. 100-647, set out
as a note under section 56 of this title.
Amendment by section 6009(c)(3) of Pub. L. 100-647 applicable to
taxable years beginning after Dec. 31, 1989, see section 6009(d) of
Pub. L. 100-647, set out as a note under section 86 of this title.
EFFECTIVE DATE OF 1987 AMENDMENT
Amendment by Pub. L. 100-203 effective as if included in the
amendments made by section 501 of the Tax Reform Act of 1986, Pub.
L. 99-514, see section 10212(c) of Pub. L. 100-203, set out as a
note under section 58 of this title.
EFFECTIVE DATE
Section 501(c) of Pub. L. 99-514, as amended by Pub. L. 100-647,
title I, Sec. 1005(a)(10), title IV, Sec. 4003(b)(2), Nov. 10,
1988, 102 Stat. 3388, 3644, provided that:
''(1) In general. - The amendments made by this section (enacting
this section) shall apply to taxable years beginning after December
31, 1986.
''(2) Special rule for carryovers. - The amendments made by this
section shall not apply to any loss, deduction, or credit carried
to a taxable year beginning after December 31, 1986, from a taxable
year beginning before January 1, 1987.
''((3) Repealed. Pub. L. 100-647, title IV, Sec. 4003(b)(2), Nov.
10, 1988, 102 Stat. 3644.)
''(4) Income from sales of passive activities in taxable years
beginning before january 1, 1987. - If -
''(A) gain is recognized in a taxable year beginning after
December 31, 1986, from a sale or exchange of an interest in an
activity in a taxable year beginning before January 1, 1987, and
''(B) such gain would have been treated as gain from a passive
activity had section 469 of the Internal Revenue Code of 1986 (as
added by this section) been in effect for the taxable year in
which the sale or exchange occurred and for all succeeding
taxable years,
then such gain shall be treated as gain from a passive activity for
purposes of such section.''
SAVINGS PROVISION
For provisions that nothing in amendment by section 11813(b)(16)
of Pub. L. 101-508 be construed to affect treatment of certain
transactions occurring, property acquired, or items of income,
loss, deduction, or credit taken into account prior to Nov. 5,
1990, for purposes of determining liability for tax for periods
ending after Nov. 5, 1990, see section 11821(b) of Pub. L. 101-508,
set out as a note under section 29 of this title.
AMOUNTS ATTRIBUTABLE TO ACTIVITIES SUBJECT TO LIMITATIONS UNDER
SECTION 469 TREATED AS DEDUCTION ALLOCABLE TO SUCH ACTIVITY
Section 1005(c)(11) of Pub. L. 100-647 provided that: ''If -
''(A) any amount was disallowed as a deduction under section
163(d) of the Internal Revenue Code of 1954 (now 1986) (as in
effect on the day before the date of the enactment of the Reform
Act (Oct. 22, 1986)),
''(B) such amount would (but for this paragraph) be treated as
investment interest paid or accrued by the taxpayer in the
taxpayer's first taxable year beginning after December 31, 1986,
and
''(C) the taxpayer makes an election under this paragraph at
such time and in such manner as the Secretary of the Treasury or
his delegate shall prescribe,
to the extent such amount is attributable to an activity subject to
the limitations of section 469 of the 1986 Code, such amount shall
not be treated as investment interest but shall be treated as a
deduction allocable to such activity for such first taxable year.
Subsection (m) of section 469 of the 1986 Code and section
501(c)(2) of the Reform Act (Pub. L. 99-514, set out as an
Effective Date note above) shall not apply to any amount so
treated.''
TRANSITIONAL RULE FOR LOW-INCOME HOUSING
Section 502 of Pub. L. 99-514, as amended by Pub. L. 99-509,
title VIII, Sec. 8073(a), Oct. 21, 1986, 100 Stat. 1965; Pub. L.
100-647, title I, Sec. 1005(b), Nov. 10, 1988, 102 Stat. 3389,
provided that:
''(a) General Rule. - Any loss sustained by a qualified investor
with respect to an interest in a qualified low-income housing
project for any taxable year in the relief period shall not be
treated as a loss from a passive activity for purposes of section
469 of the Internal Revenue Code of 1986.
''(b) Relief Period. - For purposes of subsection (a), the term
'relief period' means the period beginning with the taxable year in
which the investor made his initial investment in the qualified
low-income housing project and ending with whichever of the
following is the earliest -
''(1) the 6th taxable year after the taxable year in which the
investor made his initial investment,
''(2) the 1st taxable year after the taxable year in which the
investor is obligated to make his last investment, or
''(3) the taxable year preceding the 1st taxable year for which
such project ceased to be a qualified low-income housing project.
''(c) Qualified Low-Income Housing Project. - For purposes of
this section, the term 'qualified low-income housing project' means
any project if -
''(1) such project meets the requirements of clause (i), (ii),
(iii), or (iv) of section 1250(a)(1)(B) (of the Internal Revenue
Code of 1986) as of the date placed in service and for each
taxable year thereafter which begins after 1986 and for which a
passive loss may be allowable with respect to such project,
''(2) the operator certifies to the Secretary of the Treasury
or his delegate that such project met the requirements of
paragraph (1) on the date of the enactment of this Act (Oct. 22,
1986) (or, if later, when placed in service) and annually
thereafter,
''(3) such project is constructed or acquired pursuant to a
binding written contract entered into on or before August 16,
1986, and
''(4) such project is placed in service before January 1, 1989.
''(d) Qualified Investor. - For purposes of this section -
''(1) In general. - The term 'qualified investor' means any
natural person who holds (directly or through 1 or more entities)
an interest in a qualified low-income housing project -
''(A) if -
''(i) in the case of a project placed in service on or
before August 16, 1986, such person held an interest in such
project on August 16, 1986, and such person made his initial
investment after December 31, 1983, or
''(ii) in the case of a project placed in service after
August 16, 1986, such person made his initial investment
after December 31, 1983, and such person held an interest in
such project on December 31, 1986, and
''(B) if such investor is required to make payments after
December 31, 1986, of 50 percent or more of the total original
obligated investment for such interest.
For purposes of subparagraph (A), a person shall be treated as
holding an interest on August 16, 1986, or December 31, 1986, if
on such date such person had a binding contract to acquire such
interest.
''(2) Treatment of estates. - The estate of a decedent shall
succeed to the treatment under this section of the decedent but
only with respect to the 1st 2 taxable years of such estate
ending after the date of the decedent's death.
''(3) Special rule for certain partnerships. - In the case of
any property which is held by a partnership -
''(A) which placed such property in service on or after
December 31, 1985, and before August 17, 1986, and continuously
held such property through the close of the taxable year for
which the determination is being made, and
''(B) which was not treated as a new partnership or as
terminated at any time on or after the date on which such
property was placed in service and through the close of the
taxable year for which the determination is being made,
paragraph (1)(A)(i) shall be applied by substituting 'December
31, 1988' for 'August 16, 1986' the 2nd place it appears.
''(4) Special rule for certain rural housing. - In the case of
any interest in a qualified low-income housing project which -
''(A) is assisted under section 515 of the Housing Act of
1949 (42 U.S.C. 1485) (relating to the Farmers' Home
Administration Program), and
''(B) is located in a town with a population of less than
10,000 and which is not part of a metropolitan statistical
area,
paragraph (1)(B) shall be applied by substituting '35 percent'
for '50 percent' and subsection (b)(1) shall be applied by
substituting '5th taxable year' for '6th taxable year'. The
preceding sentence shall not apply to any interest unless, on
December 31, 1986, at least one-half of the number of payments
required with respect to such interest remain to be paid.
''(e) Special Rules. -
''(1) Where more than 1 building in project. - If there is more
than 1 building in any project, the determination of when such
project is placed in service shall be based on when the 1st
building in such project is placed in service.
''(2) Only cash and other property taken into account. - In
determining the amount any person invests in (or is obligated to
invest in) any interest, only cash and other property shall be
taken into account.
''(3) Coordination with credit. - No low-income housing credit
shall be determined under section 42 of the Internal Revenue Code
of 1986 with respect to any project with respect to which any
person has been allowed any benefit under this section.''
(Section 8073(b) of Pub. L. 99-509 provided that: ''The amendment
made by subsection (a) (amending section 502 of Pub. L. 99-514, set
out above) shall take effect as if included in section 502 of the
Tax Reform Act of 1986 on the date of its enactment (Oct. 22,
1986).'')
References
SECTION REFERRED TO IN OTHER SECTIONS
This section is referred to in sections 32, 42, 56, 58, 108, 135,
137, 163, 219, 221, 222, 772, 773 of this title.
