Td 8645

Page 1 of 8

[4830-01-u]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 8645]
RIN

1545-AS38

Rules for Certain Rental Real Estate Activities
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final regulations providing rules for rental real estate activities of
taxpayers engaged in certain real property trades or businesses. The regulations reflect changes to the
law made by the Omnibus Budget Reconciliation Act of 1993, and affect taxpayers subject to the
limitations on passive activity losses and passive activity credits.
DATES: These regulations are effective as provided in 1.469-11 on January 1, 1995.
ADDRESSES: Send submissions to: CC:DOM:CORP:T:R (TD 8645), room 5228, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington, DC 20044. In the alternative, submissions may be hand delivered
between the hours of 8:00 a.m. and 5:00 p.m. to: CC:DOM:CORP:T:R (TD 8645), Courier's Desk, Internal
Revenue Service, 1111 Constitution Avenue NW, Washington, DC.
FOR FURTHER INFORMATION CONTACT: William M. Kostak at (202) 622-3080 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations has been reviewed and
approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act (44
U.S.C. 3504(h)) under control number 1545-AS38. The estimated annual burden per respondent varies from
0.10 hours to 0.25 hours, depending on individual circumstances, with an estimated average of 0.15
hours.
Comments concerning the accuracy of this burden estimate and suggestions for reducing this
burden should be sent to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, PC:FP,
Washington, DC 20224, and to the Office of Management and Budget, Attn: Desk Officer for the Department
of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503.
Background
This document amends 26 CFR part 1 to provide rules relating to the treatment of rental real
estate activities of certain taxpayers under the passive activity loss and credit limitations of section
469. Section 469 disallows losses from passive activities to the extent they exceed income from passive
activities and similarly disallows credits from passive activities to the extent they exceed tax
liability allocable to passive activities. In general, passive activities are activities in which the
taxpayer does not materially participate. In addition, until the enactment of the Omnibus Budget
Reconciliation Act of 1993 (OBRA 1993), all rental activities (including those in which a taxpayer
materially participated) were passive.
OBRA 1993 added section 469(c)(7), which provides that rental real estate activities of
qualifying taxpayers are not subject to the rule that treats all rental activities as passive. Thus, a
rental real estate activity of a qualifying taxpayer is not passive if the taxpayer materially
participates in the activity. Further, section 469(c)(7) provides that each of a qualifying taxpayer's
interests in rental real estate is treated as a separate activity unless the taxpayer elects to treat
all interests in rental real estate as a single activity.
On January 10, 1995, the IRS published in the Federal Register a notice of proposed rulemaking
(60 FR 2557) to provide guidance regarding section 469(c)(7). A number of public comments were received
concerning the proposed regulations, and a public hearing was held on May 11, 1995. After consideration
of the comments received, the proposed regulations are adopted as revised by this Treasury decision.
Explanation of provisions
I. General Background
The proposed regulations provide rules for determining whether a taxpayer qualifies for
treatment under section 469(c)(7). The proposed regulations also provide rules for determining the
rental real estate activities of qualifying taxpayers for purposes of section 469. Except for
modifications in response to comments received on the proposed regulations, the final regulations
generally adopt the rules contained in the proposed regulations.
II. Public Comments
Several comments requested that the Service reconsider the rule in the proposed regulations
prohibiting qualifying taxpayers from grouping rental real estate activities with other activities in
determining whether the taxpayers materially participate in the rental real estate activities. After
careful consideration, the final regulations adopt the rule in the proposed regulations because that
position is consistent with the statutory language and the legislative history.
Several comments suggested that the rule in the proposed regulations prohibiting the grouping of
rental real estate activities with other activities be modified to allow qualifying taxpayers to group
the activities of development or construction of rental real estate with rental real estate activities.
The final regulations do not adopt this modification because in most cases development and construction
activities are separate and distinct from rental activities. In addition, this modification would
introduce significant administrative difficulties in determining which development activities or

https://www.irs.gov/pub/irs-regs/td8645.txt

12/7/2016

Page 2 of 8

construction activities qualify. However, the IRS and Treasury Department invite comments concerning
whether the material participation tests in 1.469-5T(a) should be amended to include a look-back
material participation test for taxpayers significantly involved in the development or construction of
their rental real estate interests.
Several comments requested clarification regarding whether a qualifying taxpayer's participation
in a management activity may count towards material participation in a rental real estate activity if
the management activity includes the management of rental real estate owned by the taxpayer. The final
regulations clarify that a qualifying taxpayer may participate in a rental real estate activity through
participation in a management activity. In determining whether the taxpayer materially participates in
the rental real estate activity, however, work the taxpayer performs in the management activity is taken
into account only to the extent it is performed in managing the taxpayer's own rental real estate. The
final regulations also clarify that a qualifying taxpayer who owns rental real estate through an entity,
including a C corporation that is subject to section 469, may count work performed by the taxpayer in
managing the rental real estate of the entity in establishing material participation in the taxpayer's
rental real estate activities. Thus, if a qualifying taxpayer owns some interests in rental real estate
through a closely held C corporation and makes the election to treat all interests in rental real estate
as a single activity, the aggregate rental real estate activity will include those interests held
through the closely held C corporation for purposes of material participation.
One comment requested that the regulations modify the definition of trade or business to clarify
that a taxpayer's real property trades or businesses are determined without regard to the taxpayer's
grouping of activities under 1.469-4. The final regulations clarify that a taxpayer's grouping of
activities under 1.469-4 does not control the determination of the taxpayer's real property trades or
businesses for purposes of this section.
Several comments requested that the regulations provide a detailed definition of real property
trades or businesses beyond the cross-reference to section 469(c)(7)(C). However, to avoid complex and
mechanical rules, the final regulations do not adopt a detailed definition of real property trades or
businesses. Instead, the regulations provide that taxpayers may use any reasonable method for
determining their real property trades or businesses.
Several comments requested that the final regulations modify the rule in the proposed
regulations providing that only employees who are five-percent owners of their employer at all times
during the taxable year may treat personal services performed as an employee as services performed in a
real property trade or business. The comments suggested that the regulations should take into account
personal services performed by employees that are five-percent owners for a significant portion of a
taxable year. In response to these comments, the final regulations are modified to provide that an
employee may count services performed in a real property trade or business during the portion of the
taxable year that the employee is a five-percent owner in the employer.
Several comments requested clarification concerning whether a qualifying taxpayer that makes an
election to treat all interests in rental real estate as a single activity will be treated as having a
single rental real estate activity for purposes of the former passive activity rule under section
469(f). In addition, comments requested that the regulations be modified to provide that qualifying
taxpayers that make the aggregation election will be treated as having separate activities for purposes
of the disposition rules under section 469(g) and 1.469-4(g). In response to these comments, the final
regulations clarify that a qualifying taxpayer that makes the election to treat all interests in rental
real estate as a single rental real estate activity will be treated as having a single activity for all
purposes of section 469, including sections 469(f) and (g). The statutory language and the legislative
history do not support a rule allowing a qualifying taxpayer to treat all interests in rental real
estate as a single activity for purposes of material participation and section 469(f), but as separate
activities for purposes of section 469(g).
In addition, in response to comments, the final regulations provide an example illustrating the
operation of the former passive activity rule for qualifying taxpayers that make the election to treat
all interests in rental real estate as a single activity. This example illustrates that qualifying
taxpayers that make the aggregation election may use current net income from the aggregate rental real
estate activity to offset the prior-year disallowed passive losses of the aggregate rental real estate
activity, regardless of which rental real estate interests within that activity produced the income or
prior-year losses.
Some comments requested that the regulations permit qualifying taxpayers to make or revoke the
aggregation election on an amended income tax return. After careful consideration of this issue, the
final regulations adopt the rule in the proposed regulations that aggregation elections must be made or
revoked on an original return.
The final regulations provide, however, that the election may be
revoked in any year in which the facts are materially changed from those in the taxable year for which
the election was made.
In addition, one comment requested clarification as to what constitutes a material change in the
facts and circumstances that would allow a taxpayer to revoke an aggregation election. A "material
change in the facts and circumstances" has the same meaning under this section as it does under 1.4694(e)(2). However, no example has been provided because the determination of when a material change in
the facts and circumstances has occurred is intended to be a broad factual inquiry, and providing an
example or bright-line rule may inappropriately restrict the scope of that inquiry.
One comment requested the modification of the rule in the proposed regulations that the
aggregation election has no effect in years the taxpayer is not a qualifying taxpayer. Instead, the
comment suggested that, for ease of administration and compliance, the aggregation election should be
binding and irrevocable for all future years, including years in which the taxpayer is not a qualifying
taxpayer. However, the final regulations adopt the rule in the proposed regulations because the
position advocated by the comment would be unfavorable to many taxpayers and would not significantly
improve administration.

https://www.irs.gov/pub/irs-regs/td8645.txt

12/7/2016

Page 3 of 8

Several comments requested that the regulations modify the rule in the proposed regulations
treating each rental real estate interest of a passthrough entity as a separate interest of a person
owning a fifty-percent or greater interest in the capital, gain, loss, income, deduction, or credit of
the entity at any time during a taxable year. A commentator stated that this rule is burdensome on many
passthrough entities and should be eliminated or modified. The final regulations modify this rule so
that it applies only when a qualifying taxpayer owns a fifty-percent or greater interest in the capital,
profits, or losses of a passthrough entity for a taxable year. Accordingly, this rule will not apply if
a qualifying taxpayer owns a fifty-percent or greater interest in a single item of income or deduction
but does not own a fifty-percent or greater interest in the overall capital, profits, or losses of the
passthrough entity.
In response to one comment, the final regulations also clarify the application of the fiftypercent ownership rule to tiered passthrough entities. The final regulations provide that if a
passthrough entity owns a fifty-percent or greater interest in the capital, profits, or losses of
another passthrough entity for a taxable year, each interest in rental real estate of the lower-tier
entity will be a separate interest in rental real estate of the upper-tier entity.
In response to another comment, the final regulations clarify that section 469(i) applies after
the rules of section 469(c)(7) are applied. Accordingly, the $25,000 offset will be applied only
against passive losses from rental real estate activities, and not against losses that are allowable as
a result of section 469(c)(7). In addition, the final regulations clarify that adjusted gross income
for purposes of section 469(i) is not reduced by any losses from rental real estate that are allowable
as a result of section 469(c)(7).
Several comments requested a modification to the effective date provision, to provide that
aggregation elections made for taxable years beginning before January 1, 1995, are not binding for
future years. Because taxpayers had sufficient notice of the rules of section 469(c)(7) and these
regulations, this modification is unnecessary and would add administrative complexity. Accordingly, the
final regulations adopt the effective date provision of the proposed regulations.
Finally, in response to a comment, the activity regrouping rule of 1.469-4(e)(2) is clarified
to provide that a taxpayer may not regroup activities unless the taxpayer's original grouping was
clearly inappropriate or there has been a material change in the facts and circumstances that makes the
original grouping clearly inappropriate.
III. Effective Dates
In general, section 469(c)(7) applies for taxable years beginning after December 31, 1993.
These regulations are effective for taxable years beginning on or after January 1, 1995. These
regulations are also effective for elections under section 469(c)(7)(A) and paragraph (g) of these
regulations that are made with returns filed on or after January 1, 1995.
Special Analyses
It has been determined that this Treasury decision is not a significant regulatory action as
defined in EO 12866. Therefore, a regulatory assessment is not required. It also has been determined
that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the Regulatory
Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a Regulatory
Flexibility Analysis is not required.
Pursuant to section 7805(f) of the Internal Revenue Code, the
notice of proposed rulemaking preceding these regulations was submitted to the Small Business
Administration for comment on its impact on small business.
Drafting Information
The principal author of these regulations is William M. Kostak, Office of Assistant Chief
Counsel (Passthroughs and Special Industries), IRS. However, other personnel from the IRS and Treasury
Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART I--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding an entry in numerical order
to read as follows:
Authority: 26 U.S.C. 7805. * * *
Section 1.469-9 also issued under 26 U.S.C. 469(c)(6), (h)(2), and (l)(1).
Par. 2. Section 1.469-0 is amended by:
1. Revising the entry for 1.469-4(h).
2. Revising the heading for 1.469-9 and adding entries for paragraphs (a) through (j) of
1.469-9.
3. Revising the entry for 1.469-11(b)(2) and removing the entries for 1.469-11(b)(2)(i) and
(ii).
4. Revising the entry for 1.469-11(b)(3).
5. Adding an entry for 1.469-11(b)(4).
6. The revisions and additions read as follows:
1.469-0 Table of contents.
* * * * *
1.469-4

Definition of Activity.

* * * * *

https://www.irs.gov/pub/irs-regs/td8645.txt

12/7/2016

Page 4 of 8

(h) Rules for grouping rental real estate activities for taxpayers qualifying under section
469(c)(7).
* * * * *
1.469-9

Rules for certain rental real estate activities.

(a) Scope and purpose.
(b) Definitions.
(1) Trade or business.
(2) Real property trade or business.
(3) Rental real estate.
(4) Personal services.
(5) Material participation.
(6) Qualifying taxpayer.
(c) Requirements for qualifying taxpayers.
(1) In general.
(2) Closely held C corporations.
(3) Requirement of material participation in the real property trades or businesses.
(4) Treatment of spouses.
(5) Employees in real property trades or businesses.
(d) General rule for determining real property trades or businesses.
(1) Facts and circumstances.
(2) Consistency requirement.
(e) Treatment of rental real estate activities of a qualifying taxpayer.
(1) In general.
(2) Treatment as a former passive activity.
(3) Grouping rental real estate activities with other activities.
(i) In general.
(ii) Special rule for certain management activities.
(4) Example.
(f) Limited partnership interests in rental real estate activities.
(1) In general.
(2) De minimis exception.
(g) Election to treat all interests in rental real estate as a single rental real estate
activity.
(1) In general.
(2) Certain changes not material.
(3) Filing a statement to make or revoke the election.
(h) Interests in rental real estate held by certain passthrough entities.
(1) General rule.
(2) Special rule if a qualifying taxpayer holds a fifty-percent or greater interest in a
passthrough entity.
(3) Special rule for interests held in tiered passthrough
entities.
(i) [Reserved].
(j) $25,000 offset for rental real estate activities of qualifying taxpayers.
(1) In general.
(2) Example.
* * * * *
1.469-11 Effective date and transition rules.
* * * * *
(b) * * *
(2) Additional transition rule for 1992 amendments.
(3) Fresh starts under consistency rules.
(i) Regrouping when tax liability is first determined under Project PS-1-89.
(ii) Regrouping when tax liability is first determined under 1.469-4.
(iii) Regrouping when taxpayer is first subject to section 469(c)(7).
(4) Certain investment credit property.
* * * * *
Par. 3. Section 1.469-4 is amended by revising paragraphs (e) and (h).
follows:
1.469-4 Definition of Activity.

The revisions read as

* * * * *
(e) * * *
(1) Original groupings. Except as provided in paragraph (e)(2) of this section and 1.469-11,
once a taxpayer has grouped activities under this section, the taxpayer may not regroup those activities
in subsequent taxable years. Taxpayers must comply with disclosure requirements that the Commissioner
may prescribe with respect to both their original groupings and the addition and disposition of specific
activities within those chosen groupings in subsequent taxable years.
(2) Regroupings. If it is determined that a taxpayer's original grouping was clearly
inappropriate or a material change in the facts and circumstances has occurred that makes the original

https://www.irs.gov/pub/irs-regs/td8645.txt

12/7/2016

Page 5 of 8

grouping clearly inappropriate, the taxpayer must regroup the activities and must comply with disclosure
requirements that the Commissioner may prescribe.
* * * * *
(h) Rules for grouping rental real estate activities for taxpayers qualifying under section
469(c)(7). See 1.469-9 for rules for certain rental real estate activities.
Par. 4. Section 1.469-9 is added to read as follows:
1.469-9 Rules for certain rental real estate activities.
(a) Scope and purpose. This section provides guidance to taxpayers engaged in certain real
property trades or businesses on applying section 469(c)(7) to their rental real estate activities.
(b) Definitions. The following definitions apply for purposes of this section:
(1) Trade or business. A trade or business is any trade or business determined by treating the
types of activities in 1.469-4(b)(1) as if they involved the conduct of a trade or business, and any
interest in rental real estate, including any interest in rental real estate that gives rise to
deductions under section 212.
(2) Real property trade or business. Real property trade or business is defined in section
469(c)(7)(C).
(3) Rental real estate. Rental real estate is any real property used by customers or held for
use by customers in a rental activity within the meaning of 1.469-1T(e)(3). However, any rental real
estate that the taxpayer grouped with a trade or business activity under 1.469-4(d)(1)(i)(A) or (C) is
not an interest in rental real estate for purposes of this section.
(4) Personal services. Personal services means any work performed by an individual in
connection with a trade or business. However, personal services do not include any work performed by an
individual in the individual's capacity as an investor as described in 1.469-5T(f)(2)(ii).
(5) Material participation. Material participation has the same meaning as under 1.469-5T.
Paragraph (f) of this section contains rules applicable to limited partnership interests in rental real
estate that a qualifying taxpayer elects to aggregate with other interests in rental real estate of that
taxpayer.
(6) Qualifying taxpayer. A qualifying taxpayer is a taxpayer that owns at least one interest in
rental real estate and meets the requirements of paragraph (c) of this section.
(c) Requirements for qualifying taxpayers--(1) In general. A qualifying taxpayer must meet the
requirements of section 469(c)(7)(B).
(2) Closely held C corporations. A closely held C corporation meets the requirements of
paragraph (c)(1) of this section by satisfying the requirements of section 469(c)(7)(D)(i). For
purposes of section 469(c)(7)(D)(i), gross receipts do not include items of portfolio income within the
meaning of 1.469-2T(c)(3).
(3) Requirement of material participation in the real property trades or businesses. A taxpayer
must materially participate in a real property trade or business in order for the personal services
provided by the taxpayer in that real property trade or business to count towards meeting the
requirements of paragraph (c)(1) of this section.
(4) Treatment of spouses. Spouses filing a joint return are qualifying taxpayers only if one
spouse separately satisfies both requirements of section 469(c)(7)(B). In determining the real property
trades or businesses in which a married taxpayer materially participates (but not for any other purpose
under this paragraph (c)), work performed by the taxpayer's spouse in a trade or business is treated as
work performed by the taxpayer under 1.469-5T(f)(3), regardless of whether the spouses file a joint
return for the year.
(5) Employees in real property trades or businesses. For purposes of paragraph (c)(1) of this
section, personal services performed during a taxable year as an employee generally will be treated as
performed in a trade or business but will not be treated as performed in a real property trade or
business, unless the taxpayer is a five-percent owner (within the meaning of section 416(i)(1)(B)) in
the employer. If an employee is not a five-percent owner in the employer at all times during the
taxable year, only the personal services performed by the employee during the period the employee is a
five-percent owner in the employer will be treated as performed in a real property trade or business.
(d) General rule for determining real property trades or businesses--(1) Facts and circumstances.
The determination of a taxpayer's real property trades or businesses for purposes of paragraph (c) of
this section is based on all of the relevant facts and circumstances. A taxpayer may use any reasonable
method of applying the facts and circumstances in determining the real property trades or businesses in
which the taxpayer provides personal services. Depending on the facts and circumstances, a real
property trade or business consists either of one or more than one trade or business specifically
described in section 469(c)(7)(C). A taxpayer's grouping of activities under 1.469-4 does not control
the determination of the taxpayer's real property trades or businesses under this paragraph (d).
(2) Consistency requirement. Once a taxpayer determines the real property trades or businesses
in which personal services are provided for purposes of paragraph (c) of this section, the taxpayer may
not redetermine those real property trades or businesses in subsequent taxable years unless the original
determination was clearly inappropriate or there has been a material change in the facts and
circumstances that makes the original determination clearly inappropriate.
(e) Treatment of rental real estate activities of a qualifying taxpayer--(1) In general.
Section 469(c)(2) does not apply to any rental real estate activity of a taxpayer for a taxable year in
which the taxpayer is a qualifying taxpayer under paragraph (c) of this section. Instead, a rental real
estate activity of a qualifying taxpayer is a passive activity under section 469 for the taxable year
unless the taxpayer materially participates in the activity. Each interest in rental real estate of a
qualifying taxpayer will be treated as a separate rental real estate activity, unless the taxpayer makes
an election under paragraph (g) of this section to treat all interests in rental real estate as a single
rental real estate activity. Each separate rental real estate activity, or the single combined rental
real estate activity if the taxpayer makes an election under paragraph (g), will be an activity of the

https://www.irs.gov/pub/irs-regs/td8645.txt

12/7/2016

Page 6 of 8

taxpayer for all purposes of section 469, including the former passive activity rules under section
469(f) and the disposition rules under section 469(g).
(2) Treatment as a former passive activity. For any taxable year in which a qualifying taxpayer
materially participates in a rental real estate activity, that rental real estate activity will be
treated as a former passive activity under section 469(f) if disallowed deductions or credits are
allocated to the activity under 1.469-1(f)(4).
(3) Grouping rental real estate activities with other activities--(i) In general. For purposes
of this section, a qualifying taxpayer may not group a rental real estate activity with any other
activity of the taxpayer. For example, if a qualifying taxpayer develops real property, constructs
buildings, and owns an interest in rental real estate, the taxpayer's interest in rental real estate may
not be grouped with the taxpayer's development activity or construction activity. Thus, only the
participation of the taxpayer with respect to the rental real estate may be used to determine if the
taxpayer materially participates in the rental real estate activity under 1.469-5T.
(ii) Special rule for certain management activities. A qualifying taxpayer may participate in a
rental real estate activity through participation, within the meaning of 1.469-5(f) and 5T(f), in an
activity involving the management of rental real estate (even if this management activity is conducted
through a separate entity). In determining whether the taxpayer materially participates in the rental
real estate activity, however, work the taxpayer performs in the management activity is taken into
account only to the extent it is performed in managing the taxpayer's own rental real estate interests.
(4) Example. The following example illustrates the application of this paragraph (e).
Example. (i) Taxpayer B owns interests in three rental buildings, U, V and W. In 1995, B has
$30,000 of disallowed passive losses allocable to Building U and $10,000 of disallowed passive losses
allocable to Building V under 1.469-1(f)(4). In 1996, B has $5,000 of net income from building U,
$5,000 of net losses from building V, and $10,000 of net income from building W. Also in 1996, B is a
qualifying taxpayer within the meaning of paragraph (c) of this section. Each building is treated as a
separate activity of B under paragraph (e)(1) of this section, unless B makes the election under
paragraph (g) to treat the three buildings as a single rental real estate activity. If the buildings
are treated as separate activities, material participation is determined separately with respect to each
building. If B makes the election under paragraph (g) to treat the buildings as a single activity, all
participation relating to the buildings is aggregated in determining whether B materially participates
in the combined activity.
(ii) In 1996, B makes the election under paragraph (g) to treat the three buildings as a single
rental real estate activity. B works full-time managing the three buildings and thus materially
participates in the combined activity in 1996 (even if B conducts this management function through a
separate entity, including a closely held C corporation). Accordingly, the combined activity is not a
passive activity of B in 1996. Moreover, as a result of the election under paragraph (g), disallowed
passive losses of $40,000 ($30,000 + $10,000) are allocated to the combined activity. B's net income
from the activity for 1996 is $10,000 ($5,000 - $5,000 + $10,000). This net income is nonpassive income
for purposes of section 469. However, under section 469(f), the net income from a former passive
activity may be offset with the disallowed passive losses from the same activity. Because Buildings U,
V and W are treated as one activity for all purposes of section 469 due to the election under paragraph
(g), and this activity is a former passive activity under section 469(f), B may offset the $10,000 of
net income from the buildings with an equal amount of disallowed passive losses allocable to the
buildings, regardless of which buildings produced the income or losses. As a result, B has $30,000
($40,000 - $10,000) of disallowed passive losses remaining from the buildings after 1996.
(f) Limited partnership interests in rental real estate activities--(1) In general. If a
taxpayer elects under paragraph (g) of this section to treat all interests in rental real estate as a
single rental real estate activity, and at least one interest in rental real estate is held by the
taxpayer as a limited partnership interest (within the meaning of 1.469-5T(e)(3)), the combined rental
real estate activity will be treated as a limited partnership interest of the taxpayer for purposes of
determining material participation. Accordingly, the taxpayer will not be treated under this section as
materially participating in the combined rental real estate activity unless the taxpayer materially
participates in the activity under the tests listed in 1.469-5T(e)(2) (dealing with the tests for
determining the material participation of a limited partner).
(2) De minimis exception. If a qualifying taxpayer elects under paragraph (g) of this section
to treat all interests in rental real estate as a single rental real estate activity, and the taxpayer's
share of gross rental income from all of the taxpayer's limited partnership interests in rental real
estate is less than ten percent of the taxpayer's share of gross rental income from all of the
taxpayer's interests in rental real estate for the taxable year, paragraph (f)(1) of this section does
not apply. Thus the taxpayer may determine material participation under any of the tests listed in
1.469-5T(a) that apply to rental real estate activities.
(g) Election to treat all interests in rental real estate as a single rental real estate
activity--(1) In general. A qualifying taxpayer may make an election to treat all of the taxpayer's
interests in rental real estate as a single rental real estate activity. This election is binding for
the taxable year in which it is made and for all future years in which the taxpayer is a qualifying
taxpayer under paragraph (c) of this section, even if there are intervening years in which the taxpayer
is not a qualifying taxpayer. The election may be made in any year in which the taxpayer is a
qualifying taxpayer, and the failure to make the election in one year does not preclude the taxpayer
from making the election in a subsequent year. In years in which the taxpayer is not a qualifying
taxpayer, the election will not have effect and the taxpayer's activities will be those determined under
1.469-4. If there is a material change in the taxpayer's facts and circumstances, the taxpayer may
revoke the election using the procedure described in paragraph (g)(3) of this section.
(2) Certain changes not material. The fact that an election is less advantageous to the

https://www.irs.gov/pub/irs-regs/td8645.txt

12/7/2016

Page 7 of 8

taxpayer in a particular taxable year is not, of itself, a material change in the taxpayer's facts and
circumstances. Similarly, a break in the taxpayer's status as a qualifying taxpayer is not, of itself,
a material change in the taxpayer's facts and circumstances.
(3) Filing a statement to make or revoke the election. A qualifying taxpayer makes the election
to treat all interests in rental real estate as a single rental real estate activity by filing a
statement with the taxpayer's original income tax return for the taxable year. This statement must
contain a declaration that the taxpayer is a qualifying taxpayer for the taxable year and is making the
election pursuant to section 469(c)(7)(A). The taxpayer may make this election for any taxable year in
which section 469(c)(7) is applicable. A taxpayer may revoke the election only in the taxable year in
which a material change in the taxpayer's facts and circumstances occurs or in a subsequent year in
which the facts and circumstances remain materially changed from those in the taxable year for which the
election was made. To revoke the election, the taxpayer must file a statement with the taxpayer's
original income tax return for the year of revocation. This statement must contain a declaration that
the taxpayer is revoking the election under section 469(c)(7)(A) and an explanation of the nature of the
material change.
(h) Interests in rental real estate held by certain passthrough entities--(1) General rule.
Except as provided in paragraph (h)(2) of this section, a qualifying taxpayer's interest in rental real
estate held by a partnership or an S corporation (passthrough entity) is treated as a single interest in
rental real estate if the passthrough entity grouped its rental real estate as one rental activity under
1.469-4(d)(5). If the passthrough entity grouped its rental real estate into separate rental
activities under 1.469-4(d)(5), each rental real estate activity of the passthrough entity will be
treated as a separate interest in rental real estate of the qualifying taxpayer. However, the
qualifying taxpayer may elect under paragraph (g) of this section to treat all interests in rental real
estate, including the rental real estate interests held through passthrough entities, as a single rental
real estate activity.
(2) Special rule if a qualifying taxpayer holds a fifty-percent or greater interest in a
passthrough entity. If a qualifying taxpayer owns, directly or indirectly, a fifty-percent or greater
interest in the capital, profits, or losses of a passthrough entity for a taxable year, each interest in
rental real estate held by the passthrough entity will be treated as a separate interest in rental real
estate of the qualifying taxpayer, regardless of the passthrough entity's grouping of activities under
1.469-4(d)(5). However, the qualifying taxpayer may elect under paragraph (g) of this section to treat
all interests in rental real estate, including the rental real estate interests held through passthrough
entities, as a single rental real estate activity.
(3) Special rule for interests held in tiered passthrough entities. If a passthrough entity
owns a fifty-percent or greater interest in the capital, profits, or losses of another passthrough
entity for a taxable year, each interest in rental real estate held by the lower-tier entity will be
treated as a separate interest in rental real estate of the upper-tier entity, regardless of the lowertier entity's grouping of activities under 1.469-4(d)(5).
(i) [Reserved].
(j) $25,000 offset for rental real estate activities of qualifying taxpayers--(1) In general. A
qualifying taxpayer's passive losses and credits from rental real estate activities (including prioryear disallowed passive activity losses and credits from rental real estate activities in which the
taxpayer materially participates) are allowed to the extent permitted under section 469(i). The amount
of losses or credits allowable under section 469(i) is determined after the rules of this section are
applied. However, losses allowable by reason of this section are not taken into account in determining
adjusted gross income for purposes of section 469(i)(3).
(2) Example. The following example illustrates the application of this paragraph (j).
Example. (i) Taxpayer A owns building X and building Y, both interests in rental real estate.
In 1995, A is a qualifying taxpayer within the meaning of paragraph (c) of this section. A does not
elect to treat X and Y as one activity under section 469(c)(7)(A) and paragraph (g) of this section. As
a result, X and Y are treated as separate activities pursuant to section 469(c)(7)(A)(ii). A materially
participates in X which has $100,000 of passive losses disallowed from prior years and produces $20,000
of losses in 1995. A does not materially participate in Y which produces $40,000 of income in 1995. A
also has $50,000 of income from other nonpassive sources in 1995. A otherwise meets the requirements of
section 469(i).
(ii) Because X is not a passive activity in 1995, the $20,000 of losses produced by X in 1995
are nonpassive losses that may be used by A to offset part of the $50,000 of nonpassive income.
Accordingly, A is left with $30,000 ($50,000 - $20,000) of nonpassive income. In addition, A may use
the prior year disallowed passive losses of X to offset any income from X and passive income from other
sources. Therefore, A may offset the $40,000 of passive income from Y with $40,000 of passive losses
from X.
(iii) Because A has $60,000 ($100,000 - $40,000) of passive losses remaining from X and meets
all of the requirements of section 469(i), A may offset up to $25,000 of nonpassive income with passive
losses from X pursuant to section 469(i). As a result, A has $5,000 ($30,000 - $25,000) of nonpassive
income remaining and disallowed passive losses from X of $35,000 ($60,000 - $25,000) in 1995.
Par. 5. Section 1.469-11 is amended as follows:
1. Paragraph (a)(2) is amended by removing "; and" and adding ";" in its place.
2. Paragraph (a)(3) is redesignated as paragraph (a)(4) and a new paragraph (a)(3) is added.
3. Paragraph (b)(1) is revised.
4. The heading for paragraph (b)(2) is revised; the headings for paragraphs (b)(2)(i) and
(b)(2)(ii) are removed;
paragraph (b)(2)(ii) is removed, and paragraph (b)(2)(i) is redesignated as
paragraph (b)(2).
5. Paragraph (b)(3) is redesignated as paragraph (b)(4).

https://www.irs.gov/pub/irs-regs/td8645.txt

12/7/2016

Page 8 of 8

6. A new paragraph (b)(3) is added.
The added and revised provisions read as follows:
1.469-11 Effective date and transition rules.
(a) * * *
(3) The rules contained in 1.469-9 apply for taxable years beginning on or after January 1,
1995, and to elections made under 1.469-9(g) with returns filed on or after January 1, 1995; and
* * * * *
(b) * * * (1) Application of 1992 amendments for taxable years beginning before October 4, 1994.
Except as provided in paragraph (b)(2) of this section, for taxable years that end after May 10, 1992,
and begin before October 4, 1994, a taxpayer may determine tax liability in accordance with Project
PS-1-89 published at 1992-1 C.B. 1219 (see 601.601(d)(2)(ii)(b) of this chapter).
(2) Additional transition rule for 1992 amendments. * * *
(3) Fresh starts under
consistency rules--(i) Regrouping when tax liability is first determined under Project PS-1-89. For the
first taxable year in which a taxpayer determines its tax liability under Project PS-1-89, the taxpayer
may regroup its activities without regard to the manner in which the activities were grouped in the
preceding taxable year and must regroup its activities if the grouping in the preceding taxable year is
inconsistent with the rules of Project PS-1-89.
(ii) Regrouping when tax liability is first determined under 1.469-4. For the first taxable
year in which a taxpayer determines its tax liability under 1.469-4, rather than under the rules of
Project PS-1-89, the taxpayer may regroup its activities without regard to the manner in which the
activities were grouped in the preceding taxable year and must regroup its activities if the grouping in
the preceding taxable year is inconsistent with the rules of 1.469-4.
(iii) Regrouping when taxpayer is first subject to section 469(c)(7). For the first taxable
year beginning after December 31, 1993, a taxpayer may regroup its activities to the extent necessary or
appropriate to avail itself of the provisions of section 469(c)(7) and without regard to the manner in
which the activities were grouped in the preceding taxable year.
* * * * *
Margaret Milner Richardson
Commissioner of Internal Revenue
Approved:
Leslie Samuels
Assistant Secretary of the Treasury (Tax Policy)

https://www.irs.gov/pub/irs-regs/td8645.txt

12/7/2016