Pros and cons of 469(c)(7)(A) election

Tax, SDIRAs & Cost Segregation
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Pros and cons of 469(c)(7)(A) election

Kevin Noesner
Investor · Dublin, OH · Member since 2015 · 80 posts · 29 votes

It's that time of year again when I'm trying to figure out if I should aggregate all my rental properties into a single activity with the 469(c)(7)(A) election.  I'm aware that it removes the $25k deduction cap, so then what's the downside? 

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  • Logan AllecBusiness Member
    Accountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes
    10y

    Hi @Kevin Noesner, the major drawback is that existing passive losses will be suspended.  You don't release them in the year the election is made.  Also, I may be reading too much into your words here, but I'm not sure what you mean by "it's that time of year again."  469(c)(7)(A) is an irrevocable election so once made it is binding on all future tax years apart from a significant change in circumstances.  It's not an annual election that you "figure out" every year like electing to use mileage vs. actual for automobile expenses or electing to not take bonus depreciation.  That being said, I do attach the originally-filed election to my clients' returns each year so 1) there's no confusion at the IRS and 2) if my client ever leaves me their next CPA will see the election in the prior year return so there's no confusion on their part about whether or not the election was ever made.

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  • Kevin Noesner
    OP
    Investor · Dublin, OH · Member since 2015 · 80 posts · 29 votes
    10y
    Thanks Logan A. When I say it's that time of year again I think about making the election every tax season but haven't pulled the trigger yet. Can you give an example of existing passive losses? I'm not sure what that would affect.
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  • Logan AllecBusiness Member
    Accountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes
    10y

    You can only deduct passive losses to the extent you have passive income.*  If you've historically had more passive losses than passive income, then you weren't able to deduct the excess losses against your ordinary income, and your losses were "suspended" until you have enough passive income to be offset by them or until you dispose of that property, in which case the suspended losses are released.  But if you group all of your real estate activities, all future rental income is non-passive* and your historically suspended passive losses won't have passive income to offset (unless you have forms of passive income other than real estate activities), so they'll be stuck as suspended losses.

    *There is a $25k exception to this rule, but it phases out between $100k and $150k of income.

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  • Kevin Noesner
    OP
    Investor · Dublin, OH · Member since 2015 · 80 posts · 29 votes
    10y
    Thanks Logan A.
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