A taxpayer owns three rental real estate properties. Properties A and B generate losses; Property C generates income. The taxpayer is considering making an election to treat all three as a single activity. What is the primary advantage of this grouping election for purposes of the disposition of a passive activity?

Answer options:

It allows the taxpayer to deduct suspended losses from Property A if they sell only Property A.

It converts the rental income to active income.

It is generally NOT advantageous for disposition purposes because the suspended losses are not released until the entire grouped activity is disposed of.

It allows the taxpayer to use the $25,000 rental real estate allowance even if their AGI exceeds the phase-out.

How to approach this question

Evaluate the trade-off of grouping. Grouping helps meet material participation tests (for non-rentals) but hurts the ability to claim losses on disposition because the 'activity' is now the whole group.

Full Answer

C.It is generally NOT advantageous for disposition purposes because the suspended losses are not released until the entire grouped activity is disposed of.✓ Correct

Under IRC §469(g), suspended passive losses are allowed in full when the taxpayer disposes of their entire interest in the passive activity. If properties are grouped as a single activity, selling just one property is a partial disposition, and suspended losses are not released until the remaining properties in the group are sold.

Common mistakes

Thinking grouping helps with disposition; it usually helps with material participation but hinders disposition loss release.

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