PLR 200901009: Real estate professionals get 60 days to group all their rentals into one activity

Plain-English summary

Rental activity is passive by default, which caps the losses an owner can deduct. Section 469(c)(7) lifts that presumption for people in a real property trade or business, but it applies rental interest by rental interest, so a landlord with several properties has to clear the material participation bar on each one separately. The escape hatch is an election to treat every rental real estate interest as a single activity, which lets participation across the whole portfolio be counted together.

That election is made by attaching a statement described in section 1.469-9(g)(3) to the original return for the year. This married couple filed their joint return for the year in question without the statement.

Because the deadline for the election comes from a regulation rather than the statute, it is a regulatory election eligible for discretionary relief under section 301.9100-3, which turns on reasonable and good faith conduct plus no prejudice to the Government. The IRS found both satisfied and gave the couple 60 days to make the election, effective for that year, by attaching the required statement and a copy of the ruling to an amended return.

The relief is procedural only. The letter expressly declines to say whether the couple actually meets the real property business tests of section 469(c)(7)(B) or materially participates in anything, which are the substantive questions that decide whether the grouping helps them.

Ruling snapshot

• Question: May taxpayers who omitted the section 1.469-9(g)(3) statement from
  their original return still elect to treat all rental real estate interests as one activity?
• Outcome: Approved. 60 days from the date of the letter to make the election on
  an amended return, effective for the year at issue; no opinion on section 469(c)(7)(B) qualification or material participation.
• Key authorities: I.R.C. § 469(c)(2), (c)(7)(A), (c)(7)(B); Treas. Reg.
  § 1.469-9(g)(3); Treas. Reg. §§ 301.9100-1(b) and (c), 301.9100-2, 301.9100-3.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 200901009 Third Party Communication: None
Release Date: 1/2/2009 Date of Communication: Not Applicable

Person To Contact:
Index Number: 9100.00-00, 469.00-00, ------------------------, ID No. ------------- 469.03-00, 469.03-03 Telephone Number:
--------------------
---------------------------------------------- Refer Reply To:
--------------------------------- CC:PSI:B02
------------------------------ PLR-116628-08
Date:
October 06, 2008

Legend

Taxpayers = ----------------------------------------------
---------------------------------------------------------------------

Year1 = -------

Dear ------------------------------------------:

This responds to a letter dated April 2, 2008, and subsequent correspondence, submitted on behalf of Taxpayers by their authorized representative, requesting an extension of time under § 301.9100-3 of the Procedure and Administration Regulations to file an election under § 469(c)(7) of the Internal Revenue Code and § 1.469-9(g)(3) of the Income Tax Regulations to treat all interests in rental real estate as a single rental real estate activity.

According to the information submitted, Taxpayers are married individuals who filed their tax returns jointly. Taxpayers represent that in Year1 they were in a real property business as defined by § 469 and were qualified under § 469(c)(7)(B) to make an election to treat all interests in rental real estate as a single rental real estate activity. However, Taxpayers filed their joint return for Year1 without the statement required under § 1.469-9(g)(3).

Under § 469(c)(2), the term “passive activity” generally includes any rental activity. Section 469(c)(7) provides a limited exception to this rule for taxpayers in a real property trade or business. Specifically, § 469(c)(7)(A) indicates that if a taxpayer meets the requirements of section 469(c)(7)(B), the taxpayer’s rental real estate activity will no longer be presumptively passive. By its terms, the exception under
§ 469(c)(7)(A) is to be applied as if each interest of the taxpayer in rental real estate were a separate activity. However, a taxpayer may elect to treat all interests in rental real estate as a single activity.

Section 1.469-9(g)(3) provides that 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. Section 1.469-9(g)(3) describes the information that must be contained in the statement.

Under § 301.9100-1(c), the Commissioner may grant a reasonable extension of time to make a regulatory election, or a statutory election (but no more than 6 months except in the case of a taxpayer who is abroad), under all subtitles of the Internal Revenue Code except subtitles E, G, H, and I. Section 301.9100-1(b) defines the term “regulatory election” as including an election whose due date is prescribed by a regulation published in the Internal Revenue Bulletin.

Sections 301.9100-1 through 301.9100-3 provide the standards the Commissioner will use to determine whether to grant an extension of time to make the election.

Section 301.9100-2 provides the rules governing automatic extensions of time for making certain elections. Section 301.9100-3 provides the standards the Commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of § 301.9100-2.

Section 301.9100-3 provides that requests for relief under § 301.9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and that the grant of relief will not prejudice the interests of the government.

Based solely on the information submitted and the representations made, we conclude that the requirements of §§ 301.9100-1 and 301.9100-3 have been satisfied. As a result, Taxpayers are granted an extension of time of 60 days from the date of this letter to make an election under § 469(c)(7)(A) to treat all their interests in rental real estate as a single rental real estate activity effective Year1. The election must be in the form of the statement required by § 1.469-9(g)(3) and attached to an amended return for Year1. A copy of this letter should be attached to the election. A copy is enclosed for that purpose.

Except as specifically set forth above, no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the Code. Specifically, no opinion is expressed concerning whether Taxpayers satisfy the requirements under § 469(c)(7)(B) or whether Taxpayers materially participate in any activity.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.

In accordance with the power of attorney on file with this office, copies of this letter are being sent to your authorized representatives.

Sincerely,

William P. O’Shea
Associate Chief Counsel
(Passthroughs & Special Industries)

Enclosures (2):
Copy of this letter
Copy for § 6110 purposes

cc: