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method for computing passive activity loss within the “activity”
grouping.
Section 469(d)(1) defines “passive activity loss” as “the
amount (if any) by which–-(A) the aggregate losses from all
passive activities for the taxable year, exceed (B) the aggregate
income from all passive activities for such year.” Passive
activity loss is computed by first netting items of income and
loss within each passive activity and then subtracting aggregate
income from all passive activities from aggregate losses. See
id.; sec. 1.469-2T, Temporary Income Tax Regs., 53 Fed. Reg. 5686
(Feb. 25, 1988).
In carrying out the provisions of section 469, section
469(l)(2) authorizes the Secretary to promulgate regulations
“which provide that certain items of gross income will not be
taken into account in determining income or loss from any
activity (and the treatment of expenses allocable to such
income)”. While the general rule of section 469(c)(2)
characterizes all rental activity as passive, section 1.469-
2(f)(6), Income Tax Regs., requires net rental income received by
the taxpayer for use of an item of the taxpayer’s property in a
business in which the taxpayer materially participates to be
treated as income not from a passive activity (sometimes referred
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