Real Estate Professionals Allowed Late Election to Aggregate Rental Real Estate Interests
Revenue Procedure 2011-34
In a Revenue Procedure, IRS has provided guidance that allows certain real estate professionals to make a late election under Regulation § 1.469-9(g) to treat all interests in rental real estate as a single rental real estate activity for purposes of the passive activity loss (PAL) rules.
Under Code Section 469(c)(1), the PAL disallowance rules apply to any trade or business in which the taxpayer does not materially participate. A taxpayer is treated as materially participating in an activity if he meets at least one of the seven tests in Regulation § 1.469-5T. In general, any rental activity is per se a passive activity regardless of the taxpayer’s participation in the activity. However, there are exceptions to the general per se rule.
The Code’s per se rule for rental activities doesn’t apply to a qualifying real estate professional. A taxpayer qualifies as such for a particular tax year if: (1) more than half of the personal services that he performs during that year are performed in real property trades or businesses in which he materially participates; and (2) he performs more than 750 hours of services during that tax year in real property trades or businesses in which he materially participates.
If a taxpayer is a qualifying real estate professional, the PAL rules generally are applied as if each interest of the taxpayer in real estate were a separate activity. But a qualifying taxpayer may elect to treat all his interests in rental real estate as one activity.
The election is made by filing a statement with the taxpayer’s original income tax return for the tax year. This statement must contain a declaration that the taxpayer is a qualifying taxpayer for the tax year and is making the election under Code Sec. 469(c)(7)(a).
Late filing relief
A taxpayer receiving relief under Revenue Procedure 2011-34 is treated as having made a timely election to treat all interests in rental real estate as a single rental real estate activity as of the tax year for which the late election was requested. A taxpayer is eligible for an extension of time to file an election under Revenue Procedure 2011-34 if he represents in a statement (under penalties of perjury) that he:
… failed to make the election solely because he failed to timely meet the requirements in Regulation § 1.469-9(g);
… filed consistently with having made an election under Regulation § 1.469-9(g) on any return that would have been affected if he had timely made the election. He must have filed all required federal income tax returns consistent with the requested aggregation for all of the years, including and following the year he intends the requested aggregation to be effective, and no tax returns containing positions inconsistent with the requested aggregation may have been filed by or with respect to him during any of the tax years;
… timely filed each return that would have been affected by the election if it had been timely made. He will be treated as having timely filed a required tax or information return if the return is filed within six months after its due date, excluding extensions; and
… has reasonable cause for failing to meet the requirements in Regulation § 1.469-9(g)
A taxpayer must attach the statement required to an amended return for the most recent tax year and mail it to the IRS service center where the taxpayer will file its current year tax return. The statement must contain the declaration required by Regulation § 1.469-9(g), explain the reason for the failure to file a timely election, and include the above representations. The statement must identify the tax year for which it seeks to make the late election and must state at the top “FILED PURSUANT TO REVENUE PROCEDURE 2011-34.”