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On July 9, 2003, in response to an examination of their
returns, petitioners provided respondent a document entitled
“Election to Aggregate Activities” for the Port Deposit property,
Sanibel property, and other properties. This election was not
filed with petitioners’ joint returns for 1999 and 2000.
Respondent contends that petitioners are not entitled to
deduct the full amounts of losses associated with their rental
activity because of passive activity loss limitations under
section 469.1 Respondent further contends that petitioners are
liable for accuracy-related penalties under section 6662(a) due
to negligence or disregard of the rules or regulations.
Discussion
Whether losses attributable to rental real estate activities
are deductible in full depends upon the classification of such
activities. In general, a rental activity is a “passive
activity,” even if the taxpayer “materially participates” in such
activity. Sec. 469(c)(2), (4). The deductible amount of
aggregate losses from a rental activity for the taxable year is
thus limited to the aggregate income from all passive activities
for the corresponding year. The excess, if any, of the losses
over the income is a “passive activity loss”. Sec. 469(d)(1).
The passive activity loss is then disallowed as a deduction to
1 Respondent does not contest the amount of the reported
losses, but instead contests the extent to which petitioners are
entitled to deduct such losses.
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Last modified: May 25, 2011