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Passive loss limitation. (In Session).

The 1986 Tax Reform Act contained a provision known as passive loss limitation, which limited the amount of deductions for losses from passive activities to the amount of income those activities generate. Rental activity was deemed to be inherently passive even if rental activity is the principal business of the taxpayer or is an integral part of the taxpayer's real estate business.

The Budget Reconciliation Act of 1993 included a passive loss tax law change intended to allow individuals, whose primary business is real estate, to deduct rental property losses from their income. According to the Act, in order to deduct passive losses from rental activity, an individual must be a material participant in the real estate trade or business, and spend more than 750 hours and a minimum of 50 percent of their time in various real estate activities. Regulations released by the IRS in February 1995 were unfavorable to the real estate industry as they treated rental real estate activity differently than other real estate activity. Rules released in December 1995 were intended to allow individuals whose primary business is real estate to deduct rental property losses from income.

Taxpayers must qualify by either materially participating in at least 750 hours of real estate activities or devoting half their time annually to real estate activities. Additionally, if the taxpayer works in the real estate field, he or she must own at least 5 percent of the business in order for the time worked to count.

The Institute believes that active or material participants in real estate should be allowed to deduct all cash and non-cash rental losses against their other income and should be afforded the same benefits that other businesses have within the tax code. As part of the Budget Reconciliation Act of 1993, Congress qualified that real estate professionals who spend at least 750 hours and half their time annually in real estate activities will be permitted to use losses on rental real estate to offset any income. The Institute urges the IRS to revise passive tax loss regulations to mirror the original intent of federal legislators in enacting a change made in 1993 to the passive loss tax law.
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Title Annotation:rental property losses deductable from income
Author:Druckman, Amanda
Publication:Journal of Property Management
Geographic Code:1USA
Date:Jul 1, 2003
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