Internal Revenue Code:Sec. 469. Passive activity losses and credits limited

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Contents


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.
 

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