@Jim Kennedy thanks, incredibly helpful.
so i'll see your lengthy response and raise it......
here is what i gathered from an awesome article i stumbled on recently (http://www.forbes.com/sites/anthonynitti/2014/07/09/tax-geek-tuesday-the-irs-finally-figures-out-the-real-estate-professional-rules/#699c23d84760) that gives further detail into 469. please forgive me, but this was posted previously and i did not get much in return (except from @Steven Hamilton II...many thanks). question is at the very end, and concerns grouping elections.
The often cited two quantitative tests from Section 469(c)(7):
1. More than one-half of the personal services you perform in all trades or businesses for the tax year must be performed in real property trades or businesses in which you materially participate (you must spend more hours on real estate activities than non-real estate activities, to prove that you earn your living in the real estate world), and
2. You must perform more than 750 hours of services during the tax year in real property trades or businesses in which you materially participate.
How to establish “material participation” (Section 1.469-5T):
1. You participate in the activity for more than 500 hours during the year,
2. Your participation in the activity constitutes substantially all of the participation by all individuals (including non-owners) in the activity for the year,
3. Your participation is more than 100 hours during the year, and no other individual (including non-owners) participates more hours than the taxpayer,
4. The activity is a significant participation activity in which you participate for more than 100 hours during the year and your annual participation in all significant participation activities is more than 500 hours. [A significant participation activity is generally a trade or business activity (other than a rental activity) that you participate in for more than 100 hours during the year but do not materially participate in (under any of the material participation tests other than this test),]
5. You materially participated in the activity for any five tax years (whether or not consecutive) during the 10 immediately preceding tax years,
6. For a personal service activity, you materially participated for any three tax years (whether or not consecutive) preceding the current tax year, or
7. A generic facts and circumstances test.
Putting it all together:
1. Participate in a real property trade or business as defined by the statute.
2. Materially participate in that real property trade or business under one of the seven tests of Reg. Section 1.469-5T.
3. The time spent participating in real property trades or businesses—but only those real property trades or businesses in which the you materially participate—must exceed the time you spend in non-real property trades or businesses; i.e., your day job.
4. The time spent participating in real property trades or businesses—but only those real property trades or business in which you materially participate—must exceed 750 hours.
By achieving these four requirements it is my understanding that one can safely be called a “real estate professional” in the eyes of the IRS. However, if you continue reading the article, this is only the first step in being able to declare losses on one’s W-2. The next step is proving that you materially participate in YOUR RENTAL ACITIVITIES, and this is where it gets tricky top me. He goes on to discuss two different grouping elections (Section 1.469-4 & Section 1.469-9) in which you group your properties such that material participation in your rental activities can be summed across all properties.
is this necessary? do you recommend this with your clients who have multiple units?
