One-Time Opportunity under Section 469 Passive Activity Rules
If you regroup, will your tax liability decrease?

With all the changes in tax law in taking effect in 2013, a seemingly small tax election can have a tremendous impact on tax liabilities.

When you own rental properties, the income and losses generally fall within a designation of Passive and your losses are limited to Passive income until you sell a rental property. This rule means that if you have rental losses beyond your passive income in any year, your losses cannot offset other income (from wages, investment and business). Your losses are suspended until you generate passive income or sell the rental property.

Depending on the amount and type of time you spend on your rental activities, and whether they relate to any other business interests you own, you may be able to utilize losses in the current year.

There are options to treat certain rental properties as related to an active business—which means that the rental loss is considered non-passive. In addition, while one rental property may be passive, if you own enough of them, spend enough time working on them and make the correct grouping election, you may qualify as a real estate professional—allowing your rental losses to be used to offset other income annually.

Many times grouping various properties and activities can be the difference in whether current losses are deductible in this year or are suspended for future use.

While the grouping election allows various properties to be viewed as one activity, it also means that if a particular property within the group is sold, suspended losses on that property may not be triggered.

Why does all of this matter in 2013?

The Internal Revenue Service (IRS) has announced a one-time opportunity related to 2013 tax returns. Tax filers may make elections to group or regroup their activities for purposes of determining whether they are passive activity losses (PALs). This is a binding election and it cannot be changed in subsequent years without IRS approval. Therefore, understanding your current and future participation and goals is essential in making the right groupings.

This unique opportunity can impact—potentially reducing—tax obligations for the year ending and should not be ignored.

For questions and to learn how Daszkal Bolton can provide an analysis of the most financially advantageous grouping options for specific tax filers, contact Teri M. Kaye, CPA, Partner with Daszkal Bolton LLP. Teri may be contacted at 561.886.5262 or tkaye@dbllp.com.