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Discussion
Generally, individuals may not currently deduct losses from
passive activities, defined to include all rental activities and
any trade or business activity in which the taxpayer does not
materially participate. See sec. 469(a), (c)(1), (2), (4).
Material participation is involvement on a regular, continuous,
and substantial basis. See sec. 469(h); see also sec.
1.469–5T(a), Temporary Income Tax Regs., 53 Fed. Reg. 5686,
5725–5726 (Feb. 25, 1988). These passive loss rules, enacted as
part of the Tax Reform Act of 1986, Pub. L. 99–514, sec. 501, 100
Stat. 2085, 2233, prohibit affected taxpayers from using deduc-
tions of a passive activity to shelter wages or other active
income. See Staff of Joint Comm. on Taxation, General Explana-
tion of the Tax Reform Act of 1986, at 209–215 (J. Comm. Print
1987).
Although all rental activities are passive, regardless of
the taxpayer’s level of participation, Congress created an
exception for post–1993 rental activities of certain real estate
professionals. See sec. 469(c)(7).2 Under this provision, a
rental real estate activity is not per se passive if the taxpayer
2Legislative relief is also available under sec. 469(i),
which permits a taxpayer who “actively participated” in rental
real estate activities to claim a maximum loss of $25,000
annually. Sec. 469(i)(1) and (2). This exception is phased out
for taxpayers with modified adjusted gross incomes between
$100,000 and $150,000. See sec. 469(i)(3)(A), (E).
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Last modified: May 25, 2011