Question

11-18 PART 3 Deductions and Credits employee are not treated as being related to employee performing the services Owns more In addition, a closely held C corpo relief if more than 50 percent of its gross property trades or businesses in which it materia sely held C corporation may also quality O a real estate inde or business unless the than a 5 percent interest in the employer. ality for the passive activity loss year are derived from real gross receipts for the year are derived hit materially participates. e ETHICS & EQUITY Punching the Time Clock me Clock at Year-End As the end of the tax year approaches, Julie, a successful full-time real estate developer and investor, recog- nizes that her income tax situation for the year could be bleak. Unless she and her spouse, Ralph, are able to generate more hours of participation in one of her real estate rental activities, they will not reach the material participation threshold. Conse- quently, the tax losses from the venture will not be deductible. To ensure deductibility, Julie suggests the following plan: • On weekends, she and Ralph will visit the same further evaluate the operations. Also on the weekends, while they are doing their rou- ousehold shopping, they will be on the lookout for other rental properties to buy. Julie plans to count both her and Ralph's weekend hours toward the tally of total tine household shopping, participation. . She will document the time she spends "thinking about her rental activities. During the week, Ralph will visit the apartment building to oversee (in a management role) the operations of the rentals. Julie contends that the law clearly allows the efforts of one's spouse to count for purposes of the material participation tests. Likewise, nothing in the tax law requires taxpayers to be efficient in their hours of participation. How do you react? Real Estate Rental Activities with Active Participation The second exception to the passive activity loss limits is more significant in that it is not restricted to real estate professionals. This exception allows individuals to deduct nr 000 floor from real estate rental activities against active and portfolio

Answer 1

Work undertaken for the primary purpose of avoiding the dis-allowance of losses under the passive loss rule is not material participation. Thinking about rental activities will not amount to participation. The decision has to be supported with comparative statements with similar properties and other analysis documents.

Commuting is not material participation. So only one visit per apartment may be allowed and there should be time spent with the tenant. If the entire building belongs to the couple, then operations of the building can also be inspected and repair activities carried out. However only overseeing the operations do not take much time per building or per apartment. Actual repair works may take some time.

Time spent as an investor will not count unless they show direct involvement in the day to day management of the activity. So lookout for other rental properties to buy will not amount to participation.