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another aspect of his business; i.e., developing real estate,
except to the extent of the $25,000 allowance described above,
see supra note 2. By contrast, a taxpayer who materially
participated in any other trade or business could use losses
incurred in that business against active income. To “alleviate
this unfairness,” Congress modified the passive loss rules by
adding section 469(c)(7), effective for tax years beginning after
December 31, 1993. H. Rept. 103–111, at 614 (1993), 1993–3 C.B.
167, 190.4 Not wanting to overburden the real estate market,
Congress sought to exclude active participants of that industry
from the impact of section 469. It recognized, however, that an
4See also 103 Cong. Rec. 2361 (1993) (statement of Sen.
Boren):
Real estate is a major section of the U.S. economy and
is a principal asset of banks, insurance companies, and
pension funds. * * * Therefore, it is clearly in the
best interest of our Nation’s economy to have a
fundamentally sound real estate market.
* * * * * * *
The passive loss rules * * * treat people in the
rental real estate business differently than
professionals in all other businesses. * * *
This inequitable situation has had dramatic
negative economic effects. It has exacerbated the
crisis in our financial industry by discouraging real
estate professionals from holding on to troubled
properties, thereby discouraging workouts of distressed
properties. In addition, the unfavorable treatment of
losses from rental real estate has decreased the
willingness of entrepreneurs to purchase property held
by the Resolution Trust Corporation, thus increasing
the long–term exposure to all taxpayers. Finally, the
downward pressure on real property values has seriously
eroded local property tax bases.
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