26 U.S.C. § 469: Passive activity losses and credits limited

the passive activity loss, nor the passive activity credit, any individual, estate, or trust, any closely held C corporation, and any personal service corporation. Except as otherwise provided in this section, any loss or credit from an activity which is disallowed under subsection (a) shall be treated as a deduction or credit allocable to such activity in the next taxable year. which involves the conduct of any trade or business, and in which the taxpayer does not materially participate. Except as provided in paragraph (7), the term “passive activity” includes any rental activity. The term “passive activity” shall not include any working interest in any oil or gas property which the taxpayer holds directly or through an entity which does not limit the liability of the taxpayer with respect to such interest. If any taxpayer has any loss for any taxable year from a working interest in any oil or gas property which is treated as a loss which is not from a passive activity, then any net income from such property (or any property the basis of which is determined in whole or in part by reference to the basis of such property) for any succeeding taxable year shall be treated as income of the taxpayer which is not from a passive activity. If the preceding sentence applies to the net income from any property for any taxable year, any credits allowable under subpart B (other than section 27) or D of part IV of subchapter A for such taxable year which are attributable to such property shall be treated as credits not from a passive activity to the extent the amount of such credits does not exceed the regular tax liability of the taxpayer for the taxable year which is allocable to such net income. Paragraphs (2) and (3) shall be applied without regard to whether or not the taxpayer materially participates in the activity. For purposes of paragraph (1)(A), the term “trade or business” includes any activity involving research or experimentation (within the meaning of section 174). any activity in connection with a trade or business, or any activity with respect to which expenses are allowable as a deduction under section 212. paragraph (2) shall not apply to any rental real estate activity of such taxpayer for such taxable year, and this section shall be applied as if each interest of the taxpayer in rental real estate were a separate activity. more than one-half of the personal services performed in trades or businesses by the taxpayer during such taxable year are performed in real property trades or businesses in which the taxpayer materially participates, and such taxpayer performs more than 750 hours of services during the taxable year in real property trades or businesses in which the taxpayer materially participates. For purposes of this paragraph, the term “real property trade or business” means any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business. In the case of a closely held C corporation, the requirements of subparagraph (B) shall be treated as met for any taxable year if more than 50 percent of the gross receipts of such corporation for such taxable year are derived from real property trades or businesses in which the corporation materially participates. For purposes of subparagraph (B), personal services performed as an employee shall not be treated as performed in real property trades or businesses. The preceding sentence shall not apply if such employee is a 5-percent owner (as defined in section 416(i)(1)(B)) in the employer. the aggregate losses from all passive activities for the taxable year, exceed the aggregate income from all passive activities for such year. subpart D of part IV of subchapter A, or subpart B (other than section 27) of such part IV, exceeds the regular tax liability of the taxpayer for the taxable year allocable to all passive activities. gross income from interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business, expenses (other than interest) which are clearly and directly allocable to such gross income, and interest expense properly allocable to such gross income, and producing income of a type described in clause (i), or held for investment. For purposes of subparagraph (A), any income, gain, or loss which is attributable to an investment of working capital shall be treated as not derived in the ordinary course of a trade or business. shall be allowable as a deduction against net active income, and shall not be taken into account under subsection (a) to the extent so allowable as a deduction. any income or loss from a passive activity, and any item of gross income, expense, gain, or loss described in paragraph (1)(A). Earned income (within the meaning of section 911(d)(2)(A)) shall not be taken into account in computing the income or loss from a passive activity for any taxable year. For purposes of paragraphs (1) and (2), income from dividends shall be reduced by the amount of any dividends received deduction under section 243 or 245. any unused deduction allocable to such activity under subsection (b) shall be offset against the income from such activity for the taxable year, any unused credit allocable to such activity under subsection (b) shall be offset against the regular tax liability (computed after the application of paragraph (1)) allocable to such activity for the taxable year, and any such deduction or credit remaining after the application of subparagraphs (A) and (B) shall continue to be treated as arising from a passive activity. If a taxpayer ceases for any taxable year to be a closely held C corporation or personal service corporation, this section shall continue to apply to losses and credits to which this section applied for any preceding taxable year in the same manner as if such taxpayer continued to be a closely held C corporation or personal service corporation, whichever is applicable. is not a passive activity for the taxable year, but was a passive activity for any prior taxable year. any loss from such activity for such taxable year (determined after the application of subsection (b)), over any net income or gain for such taxable year from all other passive activities (determined after the application of subsection (b)), If the taxpayer and the person acquiring the interest bear a relationship to each other described in section 267(b) or section 707(b)(1), then subparagraph (A) shall not apply to any loss of the taxpayer until the taxable year in which such interest is acquired (in a transaction described in subparagraph (A)) by another person who does not bear such a relationship to the tax­payer. To the extent provided in regulations, income or gain from the activity for preceding taxable years shall be taken into account under subparagraph (A)(ii) for the taxable year to the extent necessary to prevent the avoidance of this section. the basis of such property in the hands of the transferee, over the adjusted basis of such property immediately before the death of the taxpayer, and any losses to the extent of the excess described in subparagraph (A) shall not be allowed as a deduction for any taxable year. In the case of an installment sale of an entire interest in an activity to which section 453 applies, paragraph (1) shall apply to the portion of such losses for each taxable year which bears the same ratio to all such losses as the gain recognized on such sale during such taxable year bears to the gross profit from such sale (realized or to be realized when payment is completed). regular, continuous, and substantial. Except as provided in regulations, no interest in a limited partnership as a limited partner shall be treated as an interest with respect to which a taxpayer materially participates. A taxpayer shall be treated as materially participating in any farming activity for a taxable year if paragraph (4) or (5) of section 2032A(b) would cause the requirements of section 2032A(b)(1)(C)(ii) to be met with respect to real property used in such activity if such taxpayer had died during the taxable year. 1 or more shareholders holding stock representing more than 50 percent (by value) of the outstanding stock of such corporation materially participate in such activity, or in the case of a closely held C corporation (other than a personal service corporation), the requirements of section 465(c)(7)(C) (without regard to clause (iv)) are met with respect to such activity. In determining whether a taxpayer materially participates, the participation of the spouse of the taxpayer shall be taken into account. In the case of any natural person, subsection (a) shall not apply to that portion of the passive activity loss or the deduction equivalent (within the meaning of subsection (j)(5)) of the passive activity credit for any taxable year which is attributable to all rental real estate activities with respect to which such individual actively participated in such taxable year (and if any portion of such loss or credit arose in another taxable year, in such other taxable year). The aggregate amount to which paragraph (1) applies for any taxable year shall not exceed $25,000. In the case of any taxpayer, the $25,000 amount under paragraph (2) shall be reduced (but not below zero) by 50 percent of the amount by which the adjusted gross income of the taxpayer for the taxable year exceeds $100,000. In the case of any portion of the passive activity credit for any taxable year which is attributable to the rehabilitation credit determined under section 47, subparagraph (A) shall be applied by substituting “$200,000” for “$100,000”. Subparagraph (A) shall not apply to any portion of the passive activity credit for any taxable year which is attributable to any credit determined under section 42. first, to the passive activity loss, second, to the portion of the passive activity credit to which subparagraph (B) and 1 (C) does not apply, 1 So in original. Probably should be “or”. third, to the portion of such credit to which subparagraph (B) applies, and then, to the portion of such credit to which subparagraph (C) applies. any amount includible in gross income under section 86, the amounts excludable from gross income under sections 85(c), 135, and 137, the amounts allowable as a deduction under sections 219, 221, and 250, and any passive activity loss or any loss allowable by reason of subsection (c)(7). In the case of taxable years of an estate ending less than 2 years after the date of the death of the decedent, this subsection shall apply to all rental real estate activities with respect to which such decedent actively participated before his death. For purposes of subparagraph (A), the $25,000 amount under paragraph (2) shall be reduced by the amount of the exemption under paragraph (1) (without regard to paragraph (3)) allowable to the surviving spouse of the decedent for the taxable year ending with or within the taxable year of the estate. “$12,500” for “$25,000” each place it appears, “$50,000” for “$100,000” in paragraph (3)(A), and “$100,000” for “$200,000” in paragraph (3)(B). is a married individual filing a separate return for any taxable year, and does not live apart from his spouse at all times during such taxable year. An individual shall not be treated as actively participating with respect to any interest in any rental real estate activity for any period if, at any time during such period, such interest (including any interest of the spouse of the individual) is less than 10 percent (by value) of all interests in such activity. any credit determined under section 42 for any taxable year, or any rehabilitation credit determined under section 47, 2 2 So in original. The comma probably should be a period. Except as provided in regulations, no interest as a limited partner in a limited partnership shall be treated as an interest with respect to which the taxpayer actively participates. In determining whether a taxpayer actively participates, the participation of the spouse of the taxpayer shall be taken into account. The term “closely held C corporation” means any C corporation described in section 465(a)(1)(B). by substituting “any” for “more than 10 percent”, and by substituting “any” for “50 percent or more in value” in section 318(a)(2)(C). The term “regular tax liability” has the meaning given such term by section 26(b). The passive activity loss and the passive activity credit (and the $25,000 amount under subsection (i)) shall be allocated to activities, and within activities, on a pro rata basis in such manner as the Secretary may prescribe. The deduction equivalent of credits from a passive activity for any taxable year is the amount which (if allowed as a deduction) would reduce the regular tax liability for such taxable year by an amount equal to such credits. the basis of such interest immediately before the transfer shall be increased by the amount of any passive activity losses allocable to such interest with respect to which a deduction has not been allowed by reason of subsection (a), and such losses shall not be allowable as a deduction for any taxable year. The passive activity loss of a taxpayer shall be computed without regard to qualified residence interest (within the meaning of section 163(h)(3)). The term “rental activity” means any activity where payments are principally for the use of tangible property. For purposes of determining gain or loss from a disposition of any property to which subsection (g)(1) applies, the transferor may elect to increase the basis of such property immediately before the transfer by an amount equal to the portion of any unused credit allowable under this chapter which reduced the basis of such property for the taxable year in which such credit arose. If the taxpayer elects the application of this paragraph, such portion of the passive activity credit of such taxpayer shall not be allowed for any taxable year. If a passive activity involves the use of a dwelling unit to which section 280A(c)(5) applies for any taxable year, any income, deduction, gain, or loss allocable to such use shall not be taken into account for purposes of this section for such taxable year. Except as provided in regulations, all members of an affiliated group which files a consolidated return shall be treated as 1 corporation. the basis of such interest immediately before such distribution shall be increased by the amount of any passive activity losses allocable to such interest, and such losses shall not be allowable as a deduction for any taxable year. This section shall be applied separately with respect to items attributable to each publicly traded partnership (and subsection (i) shall not apply with respect to items attributable to any such partnership). The preceding sentence shall not apply to any credit determined under section 42, or any rehabilitation credit determined under section 47, attributable to a publicly traded partnership to the extent the amount of any such credits exceeds the regular tax liability attributable to income from such partnership. interests in such partnership are traded on an established securities market, or interests in such partnership are readily tradable on a secondary market (or the substantial equivalent thereof). For purposes of subsection (g), a taxpayer shall not be treated as having disposed of his entire interest in an activity of a publicly traded partnership until he disposes of his entire interest in such partnership. For purposes of this section, a regulated investment company (as defined in section 851) holding an interest in a qualified publicly traded partnership (as defined in section 851(h)) shall be treated as a taxpayer described in subsection (a)(2) with respect to items attributable to such interest. which specify what constitutes an activity, material participation, or active participation for purposes of this section, which provide that certain items of gross income will not be taken into account in determining income or loss from any activity (and the treatment of expenses allocable to such income), requiring net income or gain from a limited partnership or other passive activity to be treated as not from a passive activity, which provide for the determination of the allocation of interest expense for purposes of this section, and which deal with changes in marital status and changes between joint returns and separate returns. Except as provided in paragraph (2), the amendments made by this section [amending this section] shall apply to property placed in service after December 31, 1989 , in taxable years ending after such date. In the case of a taxpayer who holds an indirect interest in property described in paragraph (1), the amendments made by this section shall apply only if such interest is acquired after December 31, 1989 .” The amendments made by this section [enacting this section] shall apply to taxable years beginning after December 31, 1986 . The amendments made by this section shall not apply to any loss, deduction, or credit carried to a taxable year beginning after December 31, 1986 , from a taxable year beginning before January 1, 1987 . Repealed. Pub. L. 100–647, title IV, § 4003(b)(2) , Nov. 10, 1988 , 102 Stat. 3644 .] gain is recognized in a taxable year beginning after December 31, 1986 , from a sale or exchange of an interest in an activity in a taxable year beginning before January 1, 1987 , and such gain would have been treated as gain from a passive activity had section 469 of the Internal Revenue Code of 1986 (as added by this section) been in effect for the taxable year in which the sale or exchange occurred and for all succeeding taxable years, any amount was disallowed as a deduction under section 163(d) of the Internal Revenue Code of 1954 [now 1986] (as in effect on the day before the date of the enactment of the Reform Act [ Oct. 22, 1986 ]), such amount would (but for this paragraph) be treated as investment interest paid or accrued by the taxpayer in the taxpayer’s first taxable year beginning after December 31, 1986 , and the taxpayer makes an election under this paragraph at such time and in such manner as the Secretary of the Treasury or his delegate shall prescribe, Any loss sustained by a qualified investor with respect to an interest in a qualified low-income housing project for any taxable year in the relief period shall not be treated as a loss from a passive activity for purposes of section 469 of the Internal Revenue Code of 1986. the 6th taxable year after the taxable year in which the investor made his initial investment, the 1st taxable year after the taxable year in which the investor is obligated to make his last investment, or the taxable year preceding the 1st taxable year for which such project ceased to be a qualified low-income housing project. such project meets the requirements of clause (i), (ii), (iii), or (iv) of section 1250(a)(1)(B) [of the Internal Revenue Code of 1986] as of the date placed in service and for each taxable year thereafter which begins after 1986 and for which a passive loss may be allowable with respect to such project, the operator certifies to the Secretary of the Treasury or his delegate that such project met the requirements of paragraph (1) on the date of the enactment of this Act [ Oct. 22, 1986 ] (or, if later, when placed in service) and annually thereafter, such project is constructed or acquired pursuant to a binding written contract entered into on or before August 16, 1986 , and such project is placed in service before January 1, 1989 . in the case of a project placed in service on or before August 16, 1986 , such person held an interest in such project on August 16, 1986 , and such person made his initial investment after December 31, 1983 , or in the case of a project placed in service after August 16, 1986 , such person made his initial investment after December 31, 1983 , and such person held an interest in such project on December 31, 1986 , and if such investor is required to make payments after December 31, 1986 , of 50 percent or more of the total original obligated investment for such interest. The estate of a decedent shall succeed to the treatment under this section of the decedent but only with respect to the 1st 2 taxable years of such estate ending after the date of the decedent’s death. which placed such property in service on or after December 31, 1985 , and before August 17, 1986 , and continuously held such property through the close of the taxable year for which the determination is being made, and which was not treated as a new partnership or as terminated at any time on or after the date on which such property was placed in service and through the close of the taxable year for which the determination is being made, is assisted under section 515 of the Housing Act of 1949 [ 42 U.S.C. 1485 ] (relating to the Farmers’ Home Administration Program), and is located in a town with a population of less than 10,000 and which is not part of a metropolitan statistical area, If there is more than 1 building in any project, the determination of when such project is placed in service shall be based on when the 1st building in such project is placed in service. In determining the amount any person invests in (or is obligated to invest in) any interest, only cash and other property shall be taken into account. No low-income housing credit shall be determined under section 42 of the Internal Revenue Code of 1986 with respect to any project with respect to which any person has been allowed any benefit under this section.”