Passive Losses

[Kram BergGold]

In 2007 client had taxes prepared elsewhere. They were done totally wrong. The big issue is passive lossses. My client actively participated. The 2007 losses and the suspended passive losses were treated as passive and suspended without regard to the active participation rules. However these losses are not going to do anything in 2007 except create an NOL which would have to be carried back. For many reasons we may not want to do this. Is it permissible to not avail oneself of the active participation rules and choose to suspend losses so as to carry them forward?

[Snaggletoof]

Yes You Can

If an NOL was created by doing the taxes right, then you DO have the option of rolling them forward instead of back. However, there may be an issue involved with a timely election. If you choose to rolling them forward, you must ELECT to do so, and that option might have expired with the due date of the return. Not sure about that. I could be sure if I had my Tax Book with me, but I don't.

Also, (and this could be really messy) there may also be the option to carry back the losses five years instead of two, thanks to a new provision in the stimulous bill. This means the loss could be rolled back into a year with a high tax bracket, and generate badly needed cash for the taxpayer. Could be lots of messy work going back into several returns that were prepared wrong, but taxpayer may benefit.

[Kram BergGold]

NOL is not my point

I understand my NOL options. What I need to be sure of is can I choose to ignore the active participation exception to the passive loss rules thus suspending the losses..
It is too late to elect to carry forward the NOL and we don't want to go back.

[Snaggletoof]

Active Participation Exception

OK - sorry I knocked on the wrong door - lets address active participation.

As stated before, I don't have TTB available here, but I'm not aware of anything that allows the taxpayer the choice of active or passive rules. That doesn't mean that an exception does not exist, but I believe it would be a needle-in-the-haystack. You might double-check the qualifications for active treatment - I was surprised once to find out how many hours were required to lock in an active rental.

Your original post infers this active loss occurred in 2007, but was filed incorrectly as a passive loss and thus was disallowed. And this was prepared by someone else. I hope I'm not opening up an ethical issue by proposing you simply go forward with this taxpayer and not backward. Sometimes I simply take previous returns for gospel - such as depreciation, fixed assets, suspended losses, and do not try to recreate the wheel by examining prior year returns.

[Snaggletooth]

Research

Kram, back to my station where I can access reference materials. The Tax Book does not give a yes or no to your question, probably because IRS does not do so either. However,
both TTB and IRS gives quite a repertoire of conditions which could possibly apply to make your loss passive.

TTB Deluxe discusses qualifications for active participation at bottom of p. 7-12 and continued on 7-13. Some of these may be restrictive enough to disallow active participation status. Following their link to Schedule E instructions from IRS, the IRS does not reinforce nor restrict the option of choice, refraining from language like "must" or "may."

However, on page E-2 (Schedule E instructions) there are listed even more restrictive qualifiers for active treatment, including one which I believe may apply to your original post. In particular, is #2 "You do not have any prior year unallowed losses from any passive activities."

If your client has been incorrectly filing disallowed passive losses for years and years, then it would appear that you would have to correct ALL of them, including those prior to 2007 for this instruction not to apply. If you don't wish to do this, then qualifier #2 would appear to keep the subject property from "active participation" status.

[Davc]

However, on page E-2 (Schedule E instructions) there are listed even more restrictive qualifiers for active treatment, including one which I believe may apply to your original post. In particular, is #2 "You do not have any prior year unallowed losses from any passive activities."

If your client has been incorrectly filing disallowed passive losses for years and years, then it would appear that you would have to correct ALL of them, including those prior to 2007 for this instruction not to apply. If you don't wish to do this, then qualifier #2 would appear to keep the subject property from "active participation" status.

Read that again. Those are only requirements to avoid filing form 8582 to claim the loss.