Passive activity losses can be deducted from passive activity gains and ordinary income when the underlying passive activity property is disposed of. See generally St. Charles Inv. Co. v. Commissioner, 232 F.3d 773, 776 (10th Cir. 2000), rev'g 110 T.C. 46 (1998); Veriha v. Commissioner, 139 T.C. 45, 47 (2012). A passive activity loss is defined as the excess of the aggregate losses from all passive activities for the taxable year over the aggregate income from all passive activities for that year.
Section 1.469-2(f)(6), Income Tax Regs., is commonly referred to as the "self-rental rule" or "recharacterization rule". See, e.g., Dirico v. Commissioner, 139 T.C. at 404; Veriha v. Commissioner, 139 T.C. 45, 46 (2012). The Court noted in Dirico that section 1.469-2(f)(6), Income Tax Regs., has been "upheld repeatedly" by this Court and others.
Under the self-rental rules net rental income is reclassified as nonpassive income if the taxpayer receives the rental income for use of an item of his or her property in a business in which he or she materially participates. Sec. 1.469-2(f)(6), Income Tax Regs.; see also Veriha v. Commissioner, 139 T.C. 45, 48-49 (2012). Rental income that is reclassified as nonpassive cannot be offset by passive losses.
Therefore, those losses do not offset the recharacterized (from passive activity to non-passive-activity) income from the taxpayer's profitable rental properties. Veriha v. Commissioner, 139 T.C. _, __ (slip op. at 7-8) (Aug. 8, 2012); Carlos v. Commissioner, 123 T.C. at 280-282. C. Rules for Grouping Activities
” (Citations omitted.) Veriha v. Commissioner of Internal Revenue, 139 T.C. 45, 47–48 (2012). “In general, a taxpayer is treated as materially participating in an activity only if the taxpayer is involved in the operations of the activity on a basis which is: (1) [r]egular; (2) continuous; and (3) substantial.”
" (Citations omitted.) Veriha v. Commissioner of Internal Revenue, 139 T.C. 45, 47-48 (2012). "In general, a taxpayer is treated as materially participating in an activity only if the taxpayer is involved in the operations of the activity on a basis which is: (1) [r]egular; (2) continuous; and (3) substantial."