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Federal income tax.

Tax Facts Q: 7816. What are the passive activity rules? Doc. No. 2012-22617

The IRS recently released guidance warning that trusts, estates, and personal service corporations engaged in the real property business cannot meet the qualifying tests of IRC Section 469(c)(7)(B), because that test applies only to individuals capable of performing personal services. Because of this, losses experienced by a trust, estate, or personal service corporation in the real property business cannot be deducted against that entity's other passive income.

Typically, losses from a taxpayer's passive activities can be deducted only to offset income from other passive activities. This prevents losses from passive activities from offsetting income such as salaries, dividends, and other income from "active" businesses. IRC Section 469(c)(7) (B) specifically applies to taxpayers who perform more than 750 hours of personal services in the real property business during the tax year.

This IRS guidance makes clear that Section 469(c) (7)(B) cannot be used by a trust or estate to mitigate the impact of the passive loss limitations under Section 469 because, as they are not individuals, trusts and estates are incapable of meeting the personal service requirements outlined within the real property rule.

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Title Annotation:Monthly Round-up
Publication:Tax Facts Intelligence
Date:Dec 1, 2012
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