Gregory J. Farris - Page 7




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          in which the taxpayer materially participates to be treated as              
          income not from a passive activity; this is sometimes referred to           
          as the “self-rental rule” or the “recharacterization rule”.  Sec.           
          469(c)(2); sec. 1.469-2(f)(6)(i), Income Tax Regs.  In relevant             
          part, that regulation provides as follows:                                  
                    (f)(6) Property rented to a nonpassive activity.                  
               An amount of the taxpayer’s gross rental activity                      
               income for the taxable year from an item of property                   
               equal to the net rental activity income for the year                   
               from that item of property is treated as not from a                    
               passive activity if the property—                                      
                    (i) Is rented for use in a trade or business                      
               activity * * * in which the taxpayer materially                        
               participates (within the meaning of § 1.469-5T)                        
               * * * for the taxable year.                                            
          Simply put, the regulation recharacterizes a taxpayer’s rental              
          income from property rented for use in a trade or business in               
          which the taxpayer materially participates as nonpassive income             
          and therefore not taken into account in the computation of the              
          taxpayer’s passive activity loss.                                           
               A transition rule, however, allows for an exception to the             
          recharacterization rule.  The transition rule provides that:                
               In applying * * * [the recharacterization rule] to a                   
               taxpayer’s rental of an item of property, the                          
               taxpayer’s net rental activity income * * * from the                   
               property for any taxable year beginning after December                 
               31, 1987, does not include the portion of the income                   
               (if any) that is attributable to the rental of that                    
               item of property pursuant to a written binding contract                
               entered into before February 19, 1988.  [Sec. 1.469-                   
               11(c)(1)(ii), Income Tax Regs.]                                        








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