IRS Private Letter Ruling – Electing to treat all interests in rental real estate

In IRS Private Letter Ruling No. 201117011 released April 29, 2011 (not to be used or cited as precedent under IRC section 6110(k)(3)), the Commissioner granted a taxpayer a 120 day extension to make an election under section 469(c)(7)(a) of the IRC to treat all of his rental real estate as a single rental real estate activity effective for that year. This is an important election for a taxpayer to make because it allows for the taxpayer’s losses arising out of his rental real estate to be treated as an active business activity and not passive, thus avoiding the passive-loss rules.

IRS Private Letter Ruling

Under IRC section 469(c)(2) passive activity generally includes any rental activity. However, IRC section 469(c)(7) provides a limited exception for taxpayers whose involvement is with rental real property in a trade or business. If the taxpayer spends more than half their working hours and at least 750 hours a year materially involved in real estate as a developer, broker, landlord, etc. then the taxpayer can meet the IRC requirements and the rental real estate activity will not longer be presumptivly passive. If a taxpayer has multiple different rental properties which are categorized as a separate activity each then the taxpayer may not qualify as a real property trade or business. However, if the election is made to treat all the interests in rental real estate as a single activity then the taxpayer may qualify.

Section 1.469-9(g)(3) provides that a taxpayer who qualifies may make an election to treat all interests in rental real estate as a single real estate activity by filing a statement with the taxpayer’s original income tax return for the taxable year. If a taxpayer fails to make a timely election with the original income tax return, the Commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election (but no more than six months) if the Commissioner makes a determination whether to grant the extension based on the circumstances of each individual case.

IRS Private Letter Ruling 201117011