APPLICATION OF PASSIVE LOSS RULES TO RENTAL REAL ESTATE ACTIVITIES.

SEC. 13143. APPLICATION OF PASSIVE LOSS RULES TO RENTAL REAL ESTATE ACTIVITIES. (a) Rental Real Estate Activities of Persons in Real Property Business Not Automatically Treated as Passive Activities.— Subsection (c) of section 469 (defining passive activity) is amended by adding at the end thereof the following new paragraph: “(7) Special rules for taxpayers in real property business.— “(A) In general.— If this paragraph applies to any taxpayer for a taxable year— “(i) paragraph (2) shall not apply to any rental real estate activity of such taxpayer for such taxable year, and “(ii) this section shall be applied as if each interest of the taxpayer in rental real estate were a separate activity. Notwithstanding clause (ii), a taxpayer may elect to treat all interests in rental real estate as one activity. Nothing in the preceding provisions of this subparagraph shall be construed as affecting the determination of whether the taxpayer materially participates with respect to any interest in a limited partnership as a limited partner. “(B) Taxpayers to whom paragraph applies.— This paragraph shall apply to a taxpayer for a taxable year if— “(i) more than one-half of the personal services performed in trades or businesses by the taxpayer during such taxable year are performed in real property trades or businesses in which the taxpayer materially participates, and “(ii) such taxpayer performs more than 750 hours of services during the taxable year in real property trades or businesses in which the taxpayer materially participates. In the case of a joint return, the requirements of the preceding sentence are satisfied if and only if either spouse separately satisfies such requirements. For purposes of the preceding sentence, activities in which a spouse materially participates shall be determined under subsection (h). “(C) Real property trade or business.— For purposes of this paragraph, the term ‘real property trade or business’ means any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business. “(D) Special rules for subparagraph (b).— “(i) Closely held c corporations.— In the case of a closely held C corporation, the requirements of subparagraph (B) shall be treated as met for any tax-107 STAT. 441able year if more than 50 percent of the gross receipts of such corporation for such taxable year are derived from real property trades or businesses in which the corporation materially participates. “(ii) Personal services as an employee.— For purposes of subparagraph (B), personal services performed as an employee shall not be treated as performed in real property trades or businesses. The preceding sentence shall not apply if such employee is a 5-percent owner (as defined in section 416(i)(1)(B)) in the employer.” (b) Conforming Amendments.— (1) Paragraph (2) of section 469(c) is amended by striking “The” and inserting “Except as provided in paragraph (7), the”. (2) Clause (iv) of section 469(i)(3)(E) is amended by inserting “or any loss allowable by reason of subsection (c)(7)” after “loss”. (c) Effective Date.— The amendments made by this section shall apply to taxable years beginning after December 31, 1993.