Group Self-Rental Property with Business

[sl19]

How do I  group Rental Property that's a Self-Rental to the Business on Sch C that's renting it? Under Sec. 469 this is allowed to group rental with other activities so Self-Rental losses are not wasted.

[George4Tacks]

I assume you have marked each property as a self rental. Here is the help screen for that from Lacerte:

"

This is a mandatory entry for each rental and royalty property. You can press [Ctrl]+[T] and select the type of property. For a property type that isn’t on the list, make an entry in “Other type of property” (Screen 18, code 803).

Selecting “Self-Rental” or “Land” will trigger the recharacterization of passive income rules. Under these rules, a net loss for the activity will be treated as a passive loss, while net income for the activity will be treated as nonpassive income. See IRS Publication 925, Passive Activity and At-Risk Rules, for further information."

I don't know that further grouping is necessary, but you can use Aggregate business number in the QBI section down near the bottom. Just pick a random  number and enter that number for each of the properties you want to group. Here is the help screen from Lacerte:

"Enter a number to aggregate two or more businesses. All businesses with the same number will be aggregated together.

NOTE: SSTBs may not be aggregated. See Publication 535 for more information."

@IntuitAustin  Any chance this type of F1 help screen might ever make it's way into PTO?

[TaxGuyBill]

---

@sl19 wrote:
How do I  group Rental Property that's a Self-Rental to the Business on Sch C that's renting it? Under Sec. 469 this is allowed to group rental with other activities so Self-Rental losses are not wasted.

---

I agree with George.  I'm not aware of any grouping that is necessary for a self-rental.  Can you clarify your comment about the "losses are not wasted"?  As was pointed out, they will be passive losses, and if they can't be used they will be carried forward.

If our comments aren't what you are looking for, maybe you can give more details about what you are trying to do and what §469 provision you are trying to use.

[IntuitAustin]

Hey George, 

I don't think an F1 Help Screen is currently on the product road map for PTO, but I will suggest it to our product managers and follow up here if I receive any feedback. 

[sl19]

Thank you for replies.

I am reading Section 469 and it sounds like you can group your Active business Income on Schedule C with your Self-Rental on Schedule E if both are 100% owned by you and constitute an "appropriate economic unit."  So if Grouped, the losses on the Self-rental will be netted with Active Income. They are in separate LLC's, but sounds like they can be grouped.  

Is this not accurate?  And doesn't seem like the Grouping feature in ProConnect can make this happen?

[TaxGuyBill]

The grouping in §469 is among Passive Activities and is for the purpose of achieving Material Participation.

Is the Schedule C business "Passive" where the taxpayer does not Materially Participate?  If not, the grouping does not apply.

Even if it is (which is quite unusual), I suspect that you still won't be be achieving what you want.  

[sl19]

Yes, so in my clients situation, he runs his own law firm as LLC on Schedule C.  He just purchased an office building, and his law firm pays rent to the new Office he owns in a separate LLC.   I understand the self-rental rules and limitation of losses, but I was looking to see if possibly he could group the 2 LLC's together, the Self-Rental and Law firm so he can recognize the depreciation and the rest of the rental expenses that does create a loss.  

Looking at the code https://www.law.cornell.edu/cfr/text/26/1.469-4  under (d) and the grocery store example under (ii), seems to me this grouping can be done.

[TaxGuyBill · Accepted solution]

You need to remember that §469 is about Passive Activities, including passive businesses.  So yes, if BOTH are passive activities, yes, they could be grouped.

However, "runs his own law firm" seems quite unlikely to be passive.  Assuming that is the case, you can't group them.

Even if it were to be passive, it would not get the results you are wanting.  Actually, it would get the opposite of what you want. 

If they were both passive, you could already use the passive loss of the rental against the passive business income.  The purpose of the "grouping" is to achieve Material Participation, which would make the business NON-passive.

[sl19]

yea, law firm currently NOT passive, although that's his end goal.  So sounds like §469 not even applicable in current situation.  I was doing research trying to figure a way to use the Office Building loss.  I was assuming or hoping the"trade or business" part of the grouping examples I was reading were not passive for some reason, but that doesn't make sense within 469. 

Appreciate your very helpful feedback. 

I guess his rent will be going up... Thanks.

[sl19]

TaxGuyBill,

Are you an employee of Intuit?  Seem too tax knowledgeable.

Shaun

[sjrcpa]

Bill is not an employee of Intuit. He is a tax practitioner who volunteers here. Yes he is very knowledgeable.

[Jarinmaurer]

Section §469 does allow grouping of 100% owned business with other 100% owned rentals if the rentals are used in the 100% owned trade or business.   The activities must constituent an appropriate economic unit.  If they do, then the two can be grouped together and the rental loss could offset non-passive ordinary income from the other business. In a nutshell, 469 allows you to convert your self rental and deem it material participation - i.e. converts passive losses to non-passive losses.

With the grouping election, you might be able to avoid the negative self-rental rule results by electing to “group” your business activities and rental activities for purposes of the passive loss rules — if both activities together constitute “an appropriate economic unit.”  The factors given the greatest weight when determining whether a group is an appropriate economic unit are:

• Similarities and differences in types of businesses,
• The extent of common control,
• The extent of common ownership,
• Geographical location, and
• Interdependencies between or among the activities. 
• The interdependencies factor might consider, for example, the extent to which the activities purchase or sell goods to each other; involve products or services that are normally provided together; have the same customers or employees; or are accounted for with a single set of books and records.

[reiko]

@Jarinmaurer agreed! You can make the rental loss to be nonpassive if you meet above criteria. 

[cgroubertcpa]

No one has answered the question.  It is clear that a taxpayer is allowed to group an active activity (like a dental practice) with a rental activity (by definition passive) as long as certain criteria are met - making the grouped activities an appropriate economic unit.  For example the taxpayer owns a dental practice as an s-corp.  The same taxpayer owns a rental property.  The only tenant, of the rental property is the dental practice.  Proseries should allow the dental practice and the rental property to be grouped as one economic activity.  The loss from the rental property should be allowed against the gains from the dental practice.  

It does not appear that Proseries has a way to link these activities so that the rental loss can be used against the dental practice income.

[George4Tacks]

@cgroubertcpa Each product has it's own section for questions here. You have joined in on a ProConnect Tax, which has totally different input. Start another question on  this for ProSeries and you may get some help. Or a search like this  https://proconnect.intuit.com/community/forums/searchpage/tab/message?advanced=false&allow_punctuati... may find an answer for you. 

[Terry53029]

@sl19 Here is an great article on the subject I believe you should read.

 https://www.thetaxadviser.com/issues/2010/apr/passiveactivitygroupingdisclosurestatements.html

I use ProSeries, and it does not have a method to group activities 

[Terry53029]

@sl19 In ProSeries there is a box to check for "OTHER PASSIVE EXCEPTIONS" the program then makes it non passive. You then must attach statement according to rev proc 2010-13 that you are grouping business's 

[MKayG]

@Terry53029   I have a similar situation.  The client is a farmer who owns the land, trees, etc. and leases to his own S Corporation.   The S Corporation operates the farming operations and owns the equipment and is responsible for land improvements.   We file Form 4835 for the "rental", and should be able to group the Form 4835 with the K-1 from the S Corporation un Sec 469.  I use Lacerte.  Do you know how to have Lacerte recognize this group?