Transcript ppt file

IRC §469 – Passive Activities
Part 5 (last one)
Review + passive activity flowchart
 Reporting PALs and related recordkeeping
 Cautions in dealing with §469
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Agenda
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Review – who is subject to §469?
Review – what is a passive activity?
Review – preparing Form 8582
Reminders and cautions in dealing with the
passive activity loss limitation and related
rules
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Who is subject to §469?
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§469(a)(2)
 (A) any individual, estate, or trust,
 (B) any closely held C corporation, and
 (C) any personal service corporation.
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Also partnerships and S corporations:
 Need to identify and possibly group activities
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Provide information to owners upon disposition of ownership in
passthrough entity
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§1.469-2T(c)(2)
Special rules for partners and S corporation shareholders
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§1.469-4(d)(5) and (e)(3)
§1.469-2T(e)
Election to not apply self-charged interest rule
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§1.469-7(g)
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Closely-held corporation (CHC) and §469
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“(j)(1) Closely held C corporation. The term “closely held C
corporation” means any C corporation described in section
465(a)(1)(B)”
 C corp
 Stock owned directly or indirectly by or for 5 or fewer individuals
 At any time during last half of year
 Such individuals own greater than 50% by value of the stock.
And per §1.469-1T(g)(2) is not a PSC.
 So if C corp meets both definitions, is a PSC for §469 purposes.
 Warning: PSC defined various ways throughout IRC – ck
applicable definition anytime you see reference to PSC in IRC.
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Personal service corporation (PSC) and
§469
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“(j) (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).”
§1.469-1T(g)(2)(i) – “The term “personal service corporation”
means a C corporation that is a personal service corporation for
the taxable year (within the meaning of §1.441-3(c))”
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What is a
passive activity?
No
Wage, personal
services,
investment
Activity (-4)?
Yes
Is gross income
generated principally
from use of tangible
property?
Yes
No
Tangible personal
property used by
customers?
Working interest or
trading personal
property?
No
Yes
No
Trade or
Business
per -4(b)?
Yes
No
Section
469 n/a
Yes
Yes
Does any rental
exception apply?
Is any MP
test met?
Does
280A(c)(5)
apply?
Yes
No
Yes
Yes
No
No
Is it rental of real
estate by a real
estate professional?
No
Passive activity
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Preparing Form 8582
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8582 - continued
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Example from Pub 925 (2009)
See pdf on 225K website for the full text of the example and forms
from the IRS Publication 925 for 2009.
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Activities
Activity
A – RRE-AP
A - §1231 gain
B – RRE-AP
PS1*
PS2 – PTP – sold
PS3 – sold
PS4*
* Worksheet 3
√ Sch D
2009
(15,000)
√ 2,776
(11,600)
4,000
√ LTCG 15,300
¥ (1,200)
√ LTCG 4,000
¥ (6,000)
(2,400)
¥
Sch E
2008
(6,667)
(8,225)
(2,600)
¥ (2,445)
¥ (3,000)
(1,500)
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Pub 925 – RRA-AP
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Wages
PTP2
PS3
MAGI
Less
Excess
$132,000
11,655 ($15,300 - $1200 - $2445)
(5,000) (sold, so all PAL allowed)
$138,655
(100,000)
$ 38,655
x 50%
$ 19,328
Amount allowed = $25,000 - $19,328 = $5,673
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Allocate this allowed PAL to each of the RRE-AP based on
proportion of loss from each activity
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Pub 925 – losses reported on Form 8582
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RRA-AP
PS1 and PS4
Total
Usable 469(i)
Suspended
(38,716)*
( 2,500)
(41,216)
( 5,673)
(35,543)**
* (15,000) + (6,667) + 2,776 + (11,600) + (8,225)
** allocate to the loss activities: A, B, PS4
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Suspended PALs
PAL from activities that are
not disposed of in 2009
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Pub 925 example – Schedule E
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Rental loss
Partnership 1
Partnership 2
Partnership 3
Partnership 4
Total
(9,701)
1,400
(3,645)
(9,000)
(148) Per worksheet 6
(21,094)
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Pub 925 example – Schedule D
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Activity A
Partnership 2
Partnership 3
Total
$ 2,776
15,300
4,000
$22,076
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Recordkeeping
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Need to track the suspended PAL per activity
so can add it to the activity for the
subsequent year for that activity.
Need to calculate and track amounts for AMT
purposes for each activity as well.
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§469 Cautions and Reminders
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Rental property is a dwelling unit
Rental of dwelling at less than “fair rent”
Using §469(i)
Recharacterization
Participation reminders
SPA
Activity involves mostly personal services
Debt
§1022 and individuals who died in 2010
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Rental property is a dwelling unit
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§280A(d)
Per §469(j)(10) and -1T(e)(5) – if the
limitations of §280A(c)(5) apply to rental of a
dwelling, it is not a passive activity.
So, if personal use days of owner, including
use by others at less than fair rental and use
by relatives, is more than the greater of 14
days of 10% of the rental days, any loss will
be limited under §280A(c)(5), not §469.

And if income is generated, it is not PAI.
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Rental of dwelling at less than “fair rent”
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Causes such rental days to be considered
personal use by owner
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So more likely for owner to meet use as a
residence test of §280A(d)(1) and limitations of
§280A(c)(5) rather than §469.
Question – what if donate 5 days use of your
vacation home to a silent auction held by a
charity?
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Counts as personal use days.
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Using §469(i) – RRE-AP
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Owner must actively participate in both year of loss and year loss
claimed on return
Must own at least 10% of the activity
Modified AGI per 469(i) must be below $150K
 Deductions for AGI better than from AGI.
 Consider planning if AGI near $100K start of the phase-out range
No benefit if married persons file separately unless they live
apart of entire year
No benefit to limited partner (unless future regs provide an
exception)
Be sure is a rental (no rental exception met)
Special rules for commercial revitalization deduction,
rehabilitation credit and low-income housing credit
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Recharacterization
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If have income from passive activity or gain
from disposition of passive activity or property
used in passive activity, always check if any
gain or income recharacterization rule
applies.
Recharacterization rules only apply to income
and gain, not losses.
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Participation reminders
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Always check what both spouses do.
If no work performed:
 Might still meet one of the prior year’s MP tests
Not all work counts:
 -5T(f)
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Must be work customarily done by an owner.
Not done merely to meet a test.
Work done as “investor” won’t count unless involved in management.
Documentation (-5T(f)(4))
 While contemporaneous daily time reports not required, need to
have something to show quantity and nature of work done,
particularly if close to a MP threshold.
 May also want to keep record of what others do to show that
taxpayer did or did not meet a MP test.
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EX – for the substantially all or facts and circumstances tests
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SPA – significant participation activity
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Relevant for:
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MP test
Income recharacterization
Limited partners –
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SPA MP test n/a
Income recharacterization rule can apply
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Activity involves mostly personal services,
rather than use of capital
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May be a personal service activity per -5T(d)
if capital is not a material income-producing
activity.
If yes, MP in any 3 prior years means
continual MP.
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Debt
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If debt proceeds traced to passive activity
expenditure, then interest is PAD
Exceptions:
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Debt to acquire interest in passthrough entity
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Activity also involves non-passive activity assets
Interest is QRI
Interest is required to be capitalized (-2T(d)(3))
See Notice 89-35
COD income
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Check to see if PAI – Rev. Rul 92-92
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§1022 and individuals who died in 2010
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§1022 Treatment of property acquired from a
decedent dying after December 31, 2009
(a) In general. Except as otherwise provided in this
section —
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(1) property acquired from a decedent dying after
December 31, 2009, shall be treated for purposes of this
subtitle as transferred by gift, and
(2) the basis of the person acquiring property from such a
decedent shall be the lesser of—
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(A) the adjusted basis of the decedent, or
(B) the fair market value of the property at the date of the
decedent's death.
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