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I:8-13 Passive activities rules for Laura's rentals; Kami's

I:8-13 Which of the following activities are considered passive for the year? Explain. Consider each situation

a. Laura owns a rental unit that she rents out to
students. The rental unit is Laura's only business
and she spends approximately 875 hours
per year managing, collecting the rent, advertising,
and performing minor repairs. At times
she must hire professionals such as plumbers
to do the maintenance. Is the rental unit a passive
activity with respect to Laura?

b. Kami is a medical doctor who works four days
a week in a medical practice that she and five
other doctors formed. Last year she and her
partners formed another partnership that
owns and operates a medical lab. The lab
employs ten technicians, one of whom also
acts as manager. During the year Kami spent
120 hours in meetings, reviewing records, etc.,
for the lab. Is the lab a passive activity with
respect to Kami?

c. Assume the same facts in part b. In addition,
assume that the same group of doctors have
formed two other partnerships. One is a medical
supply partnership. Kami spent 150 hours
working for this partnership. The medical supply
partnership has five full-time employees.
Kami also spent 250 hours during the year
working for the other partnership. This partnership
specializes in providing medical services
to individuals from out of town who are
staying at local hotels and motels. This partnership
hires two full-time and six part-time
nurses. Are the lab and the two other partnerships
passive activities with respect to Kami?

Solution Preview

a. Rental activity is passive by nature except where an owner can qualify as a real estate professional.

LAW: Under IRC § 469(c)(7) & Reg. 1.469-9, if the taxpayer spends the majority of his time in real property businesses, meeting the 1/2 personal services and 750-hour tests, rental real estate losses are no longer per se passive. If the taxpayer materially participates in each rental real estate activity, losses are fully deductible. If not, even though the taxpayer is a real estate professional, losses are passive and deductible only up to $25,000 (if MAGI is less than $100,000). The IRC § 469(c)(7) does not trigger carryover losses from prior years.


This taxpayer could qualify and there take all losses without limitation.

b. Following are the 7 tests to determine if a trade or business is passive to the taxpayer:

A ...

Solution Summary

The 571 word, well-cited solution quotes and explains the law regarding each situation with specific points on which a taxpayer can be judged as to whether passive or not. There are tests to pass or fail to assess passive versus non-passive activity.