Not electing to treat multiple rentals as one activity can cost real estate pros.
The material participation rules must be met on each separate rental unit, the Tax Court says. To qualify as a real estate professional, you must spend over 50% of your working hours and 750 or more hours each year materially participating in real estate as a developer, landlord, broker, etc. And if you materially participate in the rental activity, the passive loss rules do not disqualify your rental losses. Electing to group multiple rentals as a single activity makes it significantly easier
to pass the material participation tests and deduct the losses (Gragg, D.C., Calif.).
Making the election is simple. You do so by attaching a statement to the 1040 saying you treat all rentals as a single activity under section 469(c)(7)(A) of the tax code. Trusts can materially participate in real estate activities, over IRS’ objection. Thus, trusts can qualify as real estate pros and beat the passive loss rules, the Tax Court says in a case where a family trust had substantial rental losses. In figuring material participation, hours spent by trustees in their fiduciary capacity and hours they worked on the trust’s real estate business are counted.
The time spent by nontrustee employees was not addressed (Frank Aragona Trust, 142 TC No. 9). This also means trusts with rental income can beat the 3.8% Medicare surtax .Rents aren’t subject to the tax if the trust materially participates in the rental activity.