Drawback of combining future properties under real estate hours

[Nitanth Vangala]

Hey guys,

I may be interpreting this all wrong so please feel free to correct me. In reading the code on real estate professional status, it is mentioned that each rental property is listed as a separate activity. You can combine the hours for all the properties by writing a letter with the original tax return form however this further binds all the properties as one for all future years. My questions are the following:

1. What is the drawback of all properties being under one activity?

2. Does it matter in the end? Are 750 hours required on one activity or can the hours from multiple properties be added together to get the 750 hours?

Thanks!

[Michael Plaks]

@Nitanth Vangala

Yours is an excellent question. @Joseph Palmiero is technically correct. But then there is a practical angle to this.  

For many years, the IRS and even the US Tax Court misinterpreted the statute and maintained that you needed 750 hrs per activity. Therefore, unless you combined all rentals into one activity, they expected you to pass this ridiculous threshold per property, and even the Tax Court made erroneous decisions against the taxpayers using this flawed argument.

While they finally figured it out by now, and the Court has started applying the law correctly, many IRS auditors and even IRS attorneys are still under the old 750 hrs per activity thinking. I fought some very hardheaded IRS attorneys over this.

The good part is that there's really no practical disadvantage to this grouping election. It's commonly assumed that making this election locks up your passive losses until ALL properties are sold. It is incorrect. You can unlock losses specific to each sold property even if you made the aggregate election. Make this election.