Unfortunately for the Hardys, however, the court also held that if income from the LLC had been correctly reported as passive income in 2006 and 2007, the income would have fully absorbed their passive losses
in those years, and there would have been no passive loss
to carry forward to 2008.
In 2006 and 2007, Hardy had passive losses
from unrelated rental activities that, due to a lack of passive income, could not be deducted under the passive loss
limitations of Sec.
469(c)(7) passive loss
exception for real estate professionals.
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.
Under the passive loss
rule, aggregate losses from "passive" activities (see Q 7914) may generally be deducted in a year only to the extent they do not exceed aggregate income from passive activities in that year; credits from passive activities may be taken against tax liability allocated only to passive activities.
In the tax area, IREM will work with National Association of Realtors (NAR) to retain current capital gains rules as they apply to appreciated property, like-kind exchanges and carried interest, in particular by keeping capital gains tax rates at the existing 15 percent while suspending passive loss
Just think back to 1986's enactment of the passive loss
rules, which significantly curtailed the deductions available to real estate investors, setting the stage for a major decline in real estate values that lasted for more than a decade.
In addition, C corps with passive loss
carryforwards should consider electing S status.
The passive loss
rules apply to individuals, estates, trust, closely-held C Corporations and "any personal service corporation.
A section on preliminary considerations covers anti-abuse rules, investment joint venture rules, liability issues, passive loss
limitations and related tax issues.
A bill extending tax credits and easing passive loss
rules may go to President Clinton this month.
Succinctly stated by Sharon Frey, CPM, vice president of JMC Realty Group, a Dallas, TX-based commercial brokerage firm, the introduction of passive loss
rules was "onerous.