Academic journal article Journal of Accountancy

Condo Owners Fail Material Participation Test

Academic journal article Journal of Accountancy

Condo Owners Fail Material Participation Test

Article excerpt

In private letter ruling 9543003, the Internal Revenue Service ruled that a couple's participation in a hotel condominium activity did not constitute material participation for purposes o the passive loss rules. Their interest was treated as a passive activity.

The couple owned a condominium unit in a building in which all of the owners belonged to a condominium association that operated and maintained the common property. Most owners, including the couple, contracted with a company to manage and rent their units to third parties. Under the agreement, the company was the exclusive rental agent for the units and was entitled to a percentage of the gross rents as its management fee. Management company employees were available at all times. The company also provided financial, bookkeeping and other managerial services for the condominium owners.

The owners told the company when their units would be available for rental and authorized the company to pay bills on their behalf using the rental proceeds.

The taxpayers claimed they performed between 100 and 500 hours of work to manage their particular units and believed this was sufficient time to constitute material participation under IRS regulation 1.469-ST(a)(3).,

Are these activities passive?

Internal Revenue Code section 469(a) disallows deductions for passive activity losses. IRC section 469(c) defines a passive activity as one that involves the conduct of any trade or business in which the taxpayer does not materially participate--and any rental activity. …

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