§ 469. Passive activity losses and credits limited
(a)
Disallowance
(b)
Disallowed loss or credit carried to next year
Except as otherwise provided in this section, any loss or credit from an activity which is disallowed under subsection (a) shall be treated as a deduction or credit allocable to such activity in the next taxable year.
(c)
Passive activity defined
For purposes of this section—
(2)
Passive activity includes any rental activity
Except as provided in paragraph (7), the term “passive activity” includes any rental activity.
(3)
Working interests in oil and gas property
(A)
In general
The term “passive activity” shall not include any working interest in any oil or gas property which the taxpayer holds directly or through an entity which does not limit the liability of the taxpayer with respect to such interest.
(B)
Income in subsequent years
If any taxpayer has any loss for any taxable year from a working interest in any oil or gas property which is treated as a loss which is not from a passive activity, then any net income from such property (or any property the basis of which is determined in whole or in part by reference to the basis of such property) for any succeeding taxable year shall be treated as income of the taxpayer which is not from a passive activity. If the preceding sentence applies to the net income from any property for any taxable year, any credits allowable under subpart B (other than section
27
(a)) or D of part IV of subchapter A for such taxable year which are attributable to such property shall be treated as credits not from a passive activity to the extent the amount of such credits does not exceed the regular tax liability of the taxpayer for the taxable year which is allocable to such net income.
(4)
Material participation not required for paragraphs (2) and (3)
Paragraphs (2) and (3) shall be applied without regard to whether or not the taxpayer materially participates in the activity.
(5)
Trade or business includes research and experimentation activity
For purposes of paragraph (1)(A), the term “trade or business” includes any activity involving research or experimentation (within the meaning of section
174).
(6)
Activity in connection with trade or business or production of income
To the extent provided in regulations, for purposes of paragraph (1)(A), the term “trade or business” includes—
(7)
Special rules for taxpayers in real property business
(A)
In general
If this paragraph applies to any taxpayer for a taxable year—
(i)
paragraph (2) shall not apply to any rental real estate activity of such taxpayer for such taxable year, and
(ii)
this section shall be applied as if each interest of the taxpayer in rental real estate were a separate activity.
Notwithstanding clause (ii), a taxpayer may elect to treat all interests in rental real estate as one activity. Nothing in the preceding provisions of this subparagraph shall be construed as affecting the determination of whether the taxpayer materially participates with respect to any interest in a limited partnership as a limited partner.
(B)
Taxpayers to whom paragraph applies
This paragraph shall apply to a taxpayer for a taxable year if—
(i)
more than one-half of the personal services performed in trades or businesses by the taxpayer during such taxable year are performed in real property trades or businesses in which the taxpayer materially participates, and
(ii)
such taxpayer performs more than 750 hours of services during the taxable year in real property trades or businesses in which the taxpayer materially participates.
In the case of a joint return, the requirements of the preceding sentence are satisfied if and only if either spouse separately satisfies such requirements. For purposes of the preceding sentence, activities in which a spouse materially participates shall be determined under subsection (h).
(C)
Real property trade or business
For purposes of this paragraph, the term “real property trade or business” means any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.
(D)
Special rules for subparagraph (B)
(i)
Closely held C corporations
In the case of a closely held C corporation, the requirements of subparagraph (B) shall be treated as met for any taxable year if more than 50 percent of the gross receipts of such corporation for such taxable year are derived from real property trades or businesses in which the corporation materially participates.
(ii)
Personal services as an employee
For purposes of subparagraph (B), personal services performed as an employee shall not be treated as performed in real property trades or businesses. The preceding sentence shall not apply if such employee is a 5-percent owner (as defined in section
416
(i)(1)(B)) in the employer.
(d)
Passive activity loss and credit defined
For purposes of this section—
(e)
Special rules for determining income or loss from a passive activity
For purposes of this section—
(1)
Certain income not treated as income from passive activity
In determining the income or loss from any activity—
(A)
In general
There shall not be taken into account—
(i)
any—
(I)
gross income from interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business,
(2)
Passive losses of certain closely held corporations may offset active income
(A)
In general
If a closely held C corporation (other than a personal service corporation) has net active income for any taxable year, the passive activity loss of such taxpayer for such taxable year (determined without regard to this paragraph)—
(ii)
shall not be taken into account under subsection (a) to the extent so allowable as a deduction.
A similar rule shall apply in the case of any passive activity credit of the taxpayer.
(f)
Treatment of former passive activities
For purposes of this section—
(1)
In general
If an activity is a former passive activity for any taxable year—
(A)
any unused deduction allocable to such activity under subsection (b) shall be offset against the income from such activity for the taxable year,
(2)
Change in status of closely held C corporation or personal service corporation
If a taxpayer ceases for any taxable year to be a closely held C corporation or personal service corporation, this section shall continue to apply to losses and credits to which this section applied for any preceding taxable year in the same manner as if such taxpayer continued to be a closely held C corporation or personal service corporation, whichever is applicable.
(g)
Dispositions of entire interest in passive activity
If during the taxable year a taxpayer disposes of his entire interest in any passive activity (or former passive activity), the following rules shall apply:
(1)
Fully taxable transaction
(A)
In general
If all gain or loss realized on such disposition is recognized, the excess of—
(i)
any loss from such activity for such taxable year (determined after the application of subsection (b)), over
(ii)
any net income or gain for such taxable year from all other passive activities (determined after the application of subsection (b)),
shall be treated as a loss which is not from a passive activity.
(B)
Subparagraph (A) not to apply to disposition involving related party
If the taxpayer and the person acquiring the interest bear a relationship to each other described in section
267
(b) or section
707
(b)(1), then subparagraph (A) shall not apply to any loss of the taxpayer until the taxable year in which such interest is acquired (in a transaction described in subparagraph (A)) by another person who does not bear such a relationship to the taxpayer.
(2)
Disposition by death
If an interest in the activity is transferred by reason of the death of the taxpayer—
(3)
Installment sale of entire interest
In the case of an installment sale of an entire interest in an activity to which section
453 applies, paragraph (1) shall apply to the portion of such losses for each taxable year which bears the same ratio to all such losses as the gain recognized on such sale during such taxable year bears to the gross profit from such sale (realized or to be realized when payment is completed).
(h)
Material participation defined
For purposes of this section—
(1)
In general
A taxpayer shall be treated as materially participating in an activity only if the taxpayer is involved in the operations of the activity on a basis which is—
(2)
Interests in limited partnerships
Except as provided in regulations, no interest in a limited partnership as a limited partner shall be treated as an interest with respect to which a taxpayer materially participates.
(3)
Treatment of certain retired individuals and surviving spouses
A taxpayer shall be treated as materially participating in any farming activity for a taxable year if paragraph (4) or (5) of section
2032A
(b) would cause the requirements of section
2032A
(b)(1)(C)(ii) to be met with respect to real property used in such activity if such taxpayer had died during the taxable year.
(4)
Certain closely held C corporations and personal service corporations
A closely held C corporation or personal service corporation shall be treated as materially participating in an activity only if—
(i)
$25,000 offset for rental real estate activities
(1)
In general
In the case of any natural person, subsection (a) shall not apply to that portion of the passive activity loss or the deduction equivalent (within the meaning of subsection (j)(5)) of the passive activity credit for any taxable year which is attributable to all rental real estate activities with respect to which such individual actively participated in such taxable year (and if any portion of such loss or credit arose in another taxable year, in such other taxable year).
(2)
Dollar limitation
The aggregate amount to which paragraph (1) applies for any taxable year shall not exceed $25,000.
(3)
Phase-out of exemption
(A)
In general
In the case of any taxpayer, the $25,000 amount under paragraph (2) shall be reduced (but not below zero) by 50 percent of the amount by which the adjusted gross income of the taxpayer for the taxable year exceeds $100,000.
(B)
Special phase-out of rehabilitation credit
In the case of any portion of the passive activity credit for any taxable year which is attributable to the rehabilitation credit determined under section
47, subparagraph (A) shall be applied by substituting “$200,000” for “$100,000”.
(C)
Exception for commercial revitalization deduction
Subparagraph (A) shall not apply to any portion of the passive activity loss for any taxable year which is attributable to the commercial revitalization deduction under section
1400I.
(D)
Exception for low-income housing credit
Subparagraph (A) shall not apply to any portion of the passive activity credit for any taxable year which is attributable to any credit determined under section
42.
(E)
Ordering rules to reflect exceptions and separate phase-outs
If subparagraph (B), (C), or (D) applies for a taxable year, paragraph (1) shall be applied—
(4)
Special rule for estates
(A)
In general
In the case of taxable years of an estate ending less than 2 years after the date of the death of the decedent, this subsection shall apply to all rental real estate activities with respect to which such decedent actively participated before his death.
(B)
Reduction for surviving spouse’s exemption
For purposes of subparagraph (A), the $25,000 amount under paragraph (2) shall be reduced by the amount of the exemption under paragraph (1) (without regard to paragraph (3)) allowable to the surviving spouse of the decedent for the taxable year ending with or within the taxable year of the estate.
(5)
Married individuals filing separately
(6)
Active participation
(A)
In general
An individual shall not be treated as actively participating with respect to any interest in any rental real estate activity for any period if, at any time during such period, such interest (including any interest of the spouse of the individual) is less than 10 percent (by value) of all interests in such activity.
(B)
No participation requirement for low-income housing, rehabilitation credit, or commercial revitalization deduction
Paragraphs (1) and (4)(A) shall be applied without regard to the active participation requirement in the case of—
(j)
Other definitions and special rules
For purposes of this section—
(2)
Personal service corporation
(4)
Allocation of passive activity loss and credit
The passive activity loss and the passive activity credit (and the $25,000 amount under subsection (i)) shall be allocated to activities, and within activities, on a pro rata basis in such manner as the Secretary may prescribe.
(5)
Deduction equivalent
The deduction equivalent of credits from a passive activity for any taxable year is the amount which (if allowed as a deduction) would reduce the regular tax liability for such taxable year by an amount equal to such credits.
(6)
Special rule for gifts
In the case of a disposition of any interest in a passive activity by gift—
(8)
Rental activity
The term “rental activity” means any activity where payments are principally for the use of tangible property.
(9)
Election to increase basis of property by amount of disallowed credit
For purposes of determining gain or loss from a disposition of any property to which subsection (g)(1) applies, the transferor may elect to increase the basis of such property immediately before the transfer by an amount equal to the portion of any unused credit allowable under this chapter which reduced the basis of such property for the taxable year in which such credit arose. If the taxpayer elects the application of this paragraph, such portion of the passive activity credit of such taxpayer shall not be allowed for any taxable year.
(11)
Aggregation of members of affiliated groups
Except as provided in regulations, all members of an affiliated group which files a consolidated return shall be treated as 1 corporation.
(k)
Separate application of section in case of publicly traded partnerships
(1)
In general
This section shall be applied separately with respect to items attributable to each publicly traded partnership (and subsection (i) shall not apply with respect to items attributable to any such partnership). The preceding sentence shall not apply to any credit determined under section
42, or any rehabilitation credit determined under section
47, attributable to a publicly traded partnership to the extent the amount of any such credits exceeds the regular tax liability attributable to income from such partnership.
(2)
Publicly traded partnership
For purposes of this section, the term “publicly traded partnership” means any partnership if—
(3)
Coordination with subsection (g)
For purposes of subsection (g), a taxpayer shall not be treated as having disposed of his entire interest in an activity of a publicly traded partnership until he disposes of his entire interest in such partnership.
(l)
Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out provisions of this section, including regulations—
(1)
which specify what constitutes an activity, material participation, or active participation for purposes of this section,
(2)
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),
(3)
requiring net income or gain from a limited partnership or other passive activity to be treated as not from a passive activity,
(m)
Phase-in of disallowance of losses and credits for interest held before date of enactment
(1)
In general
In the case of any passive activity loss or passive activity credit for any taxable year beginning in calendar years 1987 through 1990, subsection (a) shall not apply to the applicable percentage of that portion of such loss (or such credit) which is attributable to pre-enactment interests.
(2)
Applicable percentage
For purposes of this subsection, the applicable percentage shall be determined in accordance with the following table:
| In the case of taxable years beginning in: | The applicable percentage is: |
|---|---|
| 1987 | 65 |
| 1988 | 40 |
| 1989 | 20 |
| 1990 | 10. |
(3)
Portion of loss or credit attributable to pre-enactment interests
For purposes of this subsection—
(A)
In general
The portion of the passive activity loss (or passive activity credit) for any taxable year which is attributable to pre-enactment interests is the lesser of—
(i)
the amount of the passive activity loss (or passive activity credit) which is disallowed for the taxable year under subsection (a) (without regard to this subsection), or
(ii)
the amount of the passive activity loss (or passive activity credit) which would be disallowed for the taxable year (without regard to this subsection and without regard to any amount allocable to an activity for the taxable year under subsection (b)) taking into account only pre-enactment interests.
(B)
Pre-enactment interest
(i)
In general
The term “pre-enactment interest” means any interest in a passive activity held by a taxpayer on the date of the enactment of the Tax Reform Act of 1986, and at all times thereafter.
(ii)
Binding contract exception
For purposes of clause (i), any interest acquired after such date of enactment pursuant to a written binding contract in effect on such date, and at all times thereafter, shall be treated as held on such date.
(iii)
Interest in activities
The term “pre-enactment interest” shall not include an interest in a passive activity unless such activity was being conducted on such date of enactment. The preceding sentence shall not apply to an activity commencing after such date if—