Real estate professionals get 120 days to make a late election grouping all rental properties as one activity

Plain-English summary

Rental real estate is normally treated as a "passive activity," so losses from it can only offset passive income. Section 469(c)(7) gives an exception to taxpayers who qualify as real estate professionals, and those taxpayers can elect to treat all their rental properties as a single activity, which makes it easier to show the material participation needed to deduct losses. Here a married couple qualified for the exception but their tax professional never told them the grouping election was available, so they missed it on their return. They asked the IRS for late relief under the Section 301.9100-3 regulations. Because reasonable reliance on a professional who failed to advise the election counts as acting reasonably and in good faith, the IRS granted 120 days to make the election by attaching the required statement to an amended return. The IRS took no position on whether the couple actually qualifies as real estate professionals or materially participates.

Ruling snapshot

• Question: May taxpayers get an extension of time to make a late § 469(c)(7)(A) election to treat all rental real estate interests as a single activity?
• Outcome: approved (120-day extension)
• Key authorities: IRC § 469(c)(7); Treas. Reg. §§ 1.469-9(g)(3), 301.9100-1, 301.9100-3

Full text (IRS public release)

 Internal Revenue Service                                   Department of the Treasury
                                                            Washington, DC 20224

 Number: 202308003                                          Third Party Communication: None
 Release Date: 2/24/2023                                    Date of Communication: Not Applicable
 Index Number: 469.00-00, 469.03-00,
               469.03-03, 9100.00-00                        Person To Contact:
                                                            --------------------, ID No. -----------------
 -----------------------                                    Telephone Number:
 ---------------------                                      --------------------
 ----------------------------------------                   Refer Reply To:
 ----------------------------                               CC:PSI:B01
 ------------------------------------------------           PLR-110695-22
                                                            Date:
                                                            November 17, 2022




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

Year                      =        -------


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

       This letter responds to a letter dated May 4, 2022, requesting a ruling under
§ 301.9100-3 of the Procedure and Administration Regulations that Taxpayers be
granted an extension of time to file an election under § 469(c)(7)(A) 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 commencing in Year.

                                                    FACTS

       According to the information submitted, Taxpayers are spouses who file their tax
returns jointly. Taxpayers represent that, in Year, they were in a real property business
as defined by § 469 and were qualified to elect to treat all interests in rental real estate
as a single rental real estate activity under § 469(c)(7)(A) and (B).

        Taxpayers relied on a qualified tax professional. However, Taxpayers represent
that they were not advised by their tax professional that the election under § 469(c)(7)
was available to them. As a result, Taxpayers inadvertently failed to make this election
for Year when they did not include the statement required under § 1.469-9(g)(3) with
their joint return filed for Year.
PLR-110695-22                                   2



                                    LAW AND ANALYSIS

        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 business. Specifically, § 469(c)(7)(A) indicates that if a taxpayer meets the
requirements of § 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.

        Section 301.9100-1(c) provides that the Commissioner in exercising the
Commissioner's discretion may grant a reasonable extension of time under the rules set
forth in §§ 301.9100-2 and 301.9100-3 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 Code except subtitles E, G, H, and I. Section 301.9100-1(b)
provides that the term regulatory election means an election whose due date is
prescribed by a regulation published in the Federal Register, or a revenue ruling,
revenue procedure, notice, or announcement published in the Internal Revenue Bulletin.

       Section 301.9100-2 provides the rules governing automatic extensions of time for
making certain elections. Section 301.9100-3 sets forth 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(a) provides that requests for relief subject to § 301.9100-3
will be granted when the taxpayer provides the evidence (including affidavits described
in § 301.9100-3(e)) to establish to the satisfaction of the Commissioner that the
taxpayer acted reasonably and in good faith, and the grant of relief will not prejudice the
interests of the Government.

       Section 301.9100-3(b) provides that, except as provided in § 301.9100-3(b)(3)(i)
through (iii), when a taxpayer reasonably relied on a qualified tax professional, including
a tax professional employed by the taxpayer, and the tax professional failed to make or
advise the taxpayer to make the election, the taxpayer will be deemed to have acted
reasonably and in good faith.


                                       CONCLUSION
PLR-110695-22                                  3


       Based solely on the facts submitted and the representations made, we conclude
that the requirements of § 301.9100-3 have been satisfied. As a result, Taxpayers are
granted an extension of time of 120 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 Year. The election must be in the form of the statement required
by § 1.469-9(g)(3) and attached to an amended return for Year. A copy of this letter
should be attached to the election.

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

       The ruling contained in this letter is based upon information and representations
submitted by Taxpayers and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for a ruling, it is subject to verification on examination.

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

      In accordance with a power of attorney on file with this office, we are sending a
copy of this letter to your authorized representative.



                                        Sincerely,

                                        Holly A. Porter
                                        Associate Chief Counsel
                                        (Passthroughs & Special Industries)


                                            /s/
                                 By:    __________________________________
                                        Jennifer N. Keeney
                                        Senior Counsel, Branch 1
                                        Office of the Associate Chief Counsel
                                        (Passthroughs & Special Industries)

Enclosure (1)


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