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ARTICLE · 18 MARCH 2015

How A Trust Qualified For An Exception To PAL Rules

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"Passive activity" is defined as any trade or business in which the taxpayer does not materially participate.

United StatesReal Estate and Construction
Kadir Sunardio
Kadir Sunardio
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In a favorable decision for trusts that hold real estate assets, the U.S. Tax Court has held that such a trust qualified for the real estate professional exception and was therefore exempt from the limitations on passive activity losses (PALs). The court's holding also means the trust can avoid the new 3.8% net investment income tax (NIIT) that applies to passive activity income.

Real Estate Professional Rules

"Passive activity" is defined as any trade or business in which the taxpayer does not materially participate. "Material participation" is defined as involvement in the operations of the activity that is regular, continuous and substantial. Rental real estate activities are generally considered passive regardless of whether you materially participate.

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