Relief for Late Elections to Combine Real Estate Activities

In general, rental real estate activities are automatically treated as passive activities, limiting annual losses to the extent of income from such activities. However, individuals who are “real estate professionals” are exempt from the passive loss limitations. To be a real estate professional, individuals must demonstrate material participation, which is usually determined on an activity-by-activity basis. However, an election can be made to aggregate activities for determining material participation. The election must be made by filing a statement with the original tax return; an extension request can be made for an additional 6 months to file the statement.

Under a new procedure, those who miss the original deadline do not have to ask for a private letter ruling to obtain relief, something that is costly to do. Instead, they merely have to follow new rules. They will qualify for a late election to aggregate their activities if:

• They failed to meet the time limit because of reasonable cause.
• They have filed their returns consistently as if they had made the election.
• They have filed timely returns that would have been affected by the election if it had been timely made.

Those relying on this new procedure should attach a statement to an amended return for the most recent tax year and file it with the IRS service center for the individual’s current year income tax return. The statement must include a declaration as required by Reg. §1.469-9(g)(3), an explanation of the reasonable cause for failing to file a timely election, and a declaration that the individual meets the requirements of Rev. Proc. 2011-34 (the revenue procedure creating the new relief). The statement must be signed by the individual.

Source: Rev. Proc. 2011-34