The following examples illustrate the application of this paragraph (c)(2)(ii):
Year | Gross royalties | Expenditures | Cumulative capital expenditures |
1987 | $20,000 | $8,000 | $100,000 |
1988 | 20,000 | 12,000 | 100,000 |
1989 | 60,000 | 15,000 | 115,000 |
1990 | 120,000 | 0 | 115,000 |
provided, however, that no portion of a partner's distributive share of partnership income (within the meaning of section 704(b)) or a shareholder's pro rata share of income from an S corporation (within the meaning of section 1377(a)) shall be treated as compensation for personal services.
Example. C owns 50 percent of the stock of X, an S corporation. X owns rental real estate, which it manages. X pays C a salary for services performed by C on behalf of X in connection with the management of X's rental properties. Under this paragraph (c)(4), although C's pro rata share of X's gross rental income is passive activity gross income (even if the salary paid to C is less than the fair market value of C's services), the salary paid to C does not constitute passive activity gross income.
The following example illustrates the application of this paragraph (d)(1):
Example.
Example. A, a calendar year individual, is a partner in a partnership that has a taxable year ending January 31. During its taxable year ending on January 31, 1988, the partnership engages in a single trade or business activity. For the period from February 1, 1987, through January 31, 1988, A does not materially participate in this activity. In A's calendar year 1988 return, A's distributive share of the partnership's gross income and deductions from the activity must be treated as passive activity gross income and passive activity deductions, without regard to A's participation in the activity from February 1, 1988, through December 31, 1988. See also § 1.469-11T(a)(4) (relating to the effective date of, and transition rules under, section 469 and the regulations thereunder).
then the applicable valuation date shall be the date immediately preceding the date on which such disposition occurs.
then the gain of the holder (or such other person) that is described in paragraph (e)(3)(iii)(A) of this section shall be treated as gain that is not from a passive activity to the extent that such gain does not exceed the amount of the gain of the holder (or such other person) described in paragraph (e)(3)(iii)(B) of this section. For purposes of applying the preceding sentence to the disposition of an interest in a partnership, the amount of gain that would have been allocated to the holder (or such other person) if all of the property used in an activity had been sold shall be determined by taking into account any adjustment to the basis of partnership property made with respect to such holder (or such other person) under section 743(b).
but only if such person materially participated (within the meaning of § 1.469-5T ) in the activity for such year.
Adjusted basis | Fair market value | |
X | $68,000 | $48,000 |
Y | 30,000 | 62,000 |
Z | 20,000 | 80,000 |
Marketable securities | 2,000 | 10,000 |
Total | 120,000 | 200,000 |
Activity | Net gain |
Y | $8,000 |
Z | 15,000 |
Marketable securities | 2,000 |
Total | 25,000 |
Adjusted basis per books | Fair market value | |
ASSETS | ||
Cash | $30,000 | $30,000 |
Accounts receivable: | ||
Dealership | 20,000 | 18,000 |
Inventory: | ||
Dealership | 52,000 | 66,000 |
Building | 40,000 | 66,000 |
Total | 142,000 | 180,000 |
LIABILITIES AND CAPITAL | ||
Liabilities | $30,000 | $30,000 |
Capital: | ||
B | 47,000 | 75,000 |
C | 65,000 | 75,000 |
Total | 142,000 | 180,000 |
Thus, B's gain from the sale is $14,000 ($45,000 amount realized from the sale (consisting of $37,500 of cash and $7,500 of liabilities assumed by the purchaser) minus B's $31,000 adjusted basis for the interest sold (one-half of B's total adjusted basis of $62,000)).
Example.
X | Y | Z | |
Passive activity gross income | $600 | $700 | $900 |
Passive activity deductions | (200) | (1,000) | (300) |
Net passive income | 400 | (300) | 600 |
Example. C is a limited partner in a partnership. The partnership acquires vacant land for $300,000, constructs improvements on the land at a cost of $100,000, and leases the land and improvements to a tenant. The partnership then sells the land and improvements for $600,000, thereby realizing a gain on the disposition. The unadjusted basis of the improvements ($100,000) equals 25 percent of the unadjusted basis of all property ($400,000) used in the rental activity. Therefore, under this paragraph (f)(3), an amount of C's gross income from the activity equal to the net passive income from the activity (which is computed by taking into account the gain from the disposition, including gain allocable to the improvements) is treated as not from a passive activity.
shall be treated as not from a passive activity.
Example:
Gross income: | |
Interest income | $22,000 |
Deductions: | |
Distributive share of P's expenses from the activity | (12,900) |
Interest expense on A's acquisition debt | (4,000) |
Net passive income | 5,100 |
Example.
26 C.F.R. §1.469-2T