26 U.S.C. § 469 — Passive activity losses and credits limited

Page 1634 TITLE 26—INTERNAL REVENUE CODE § 469 Subsec. (g). Pub. L. 100–647, § 1018(f)(5)(A), added sub- sec. (g). Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2006 AMENDMENT Pub. L. 109–432, div. A, title IV, § 409(b), Dec. 20, 2006, 120 Stat. 2963, provided that: ‘‘The amendment made by this section [amending this section] shall take effect as if included in section 201 of the Tax Increase Preven- tion and Reconciliation Act of 2005 [Pub. L. 109–222].’’ Pub. L. 109–222, title II, § 201(b), May 17, 2006, 120 Stat. 348, provided that: ‘‘The amendment made by sub- section (a) [amending this section] shall apply to ac- counts and funds established after the date of the en- actment of this Act [May 17, 2006].’’ EFFECTIVE DATE OF 1990 AMENDMENT Amendment by Pub. L. 101–508 effective as if included in the provision of the Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100–647, to which such amendment relates, see section 11702(j) of Pub. L. 101–508, set out as a note under section 59 of this title. EFFECTIVE DATE OF 1988 AMENDMENT Amendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title. EFFECTIVE DATE Section effective, except as otherwise provided, as if included in the provisions of the Tax Reform Act of 1984, Pub. L. 98–369, div. A, to which such amendment relates, see section 1881 of Pub. L. 99–514, set out as an Effective Date of 1986 Amendment note under section 48 of this title. PLAN AMENDMENTS NOT REQUIRED UNTIL JANUARY 1, 1989 For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§ 1101–1147 and 1171–1177] or title XVIII [§§ 1800–1899A] of Pub. L. 99–514 require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub. L. 99–514, as amended, set out as a note under section 401 of this title. SPECIAL RULE FOR TAXPAYER IN BANKRUPTCY REORGANIZATION Pub. L. 99–514, title XVIII, § 1807(a)(7)(C), Oct. 22, 1986, 100 Stat. 2816, as amended by Pub. L. 100–647, title I, § 1018(f)(3), Nov. 10, 1988, 102 Stat. 3582, provided that: ‘‘In the case of any settlement fund which is estab- lished for claimants against a corporation which filed a petition for reorganization under chapter 11 of title 11, United States Code, on August 26, 1982, and which filed with a United States district court a first amend- ed and restated plan of reorganization before March 1, 1986— ‘‘(i) any portion of such fund which is established pursuant to a court order and with qualified pay- ments, which meets the requirements of subpara- graphs (C) and (D) of section 468B(d)(2) of the Internal Revenue Code of 1954 [now 1986] (as added by this paragraph), and with respect to which an election is made under subparagraph (F) thereof, shall be treated as a designated settlement fund for purposes of sec- tion 468B of such Code, ‘‘(ii) such corporation (or any successor thereof) shall be liable for the tax imposed by section 468B of such Code on such portion of the fund (and the fund shall not be liable for such tax), such tax shall be de- ductible by the corporation, and the rate of tax under section 468B of such Code for any taxable year shall be equal to 15 percent, and ‘‘(iii) any transaction by any portion of the fund not described in clause (i) shall be treated as a trans- action made by the corporation.’’ CLARIFICATION OF LAW WITH RESPECT TO CERTAIN FUNDS Pub. L. 99–514, title XVIII, § 1807(a)(7)(D), Oct. 22, 1986, 100 Stat. 2816, provided that nothing in any provision of law be construed as providing that an escrow account, settlement fund, or similar fund established after Aug. 16, 1986, not be subject to current income tax and that if contributions to such account or fund are not deduct- ible then the account or fund be taxed as a grantor trust, prior to repeal by Pub. L. 100–647, title I, § 1018(f)(5)(B), Nov. 10, 1988, 102 Stat. 3582. § 469. Passive activity losses and credits limited (a) Disallowance (1) In general If for any taxable year the taxpayer is de- scribed in paragraph (2), neither— (A) the passive activity loss, nor (B) the passive activity credit, for the taxable year shall be allowed. (2) Persons described The following are described in this para- graph: (A) any individual, estate, or trust, (B) any closely held C corporation, and (C) any personal service corporation. (b) Disallowed loss or credit carried to next year Except as otherwise provided in this section, any loss or credit from an activity which is dis- allowed under subsection (a) shall be treated as a deduction or credit allocable to such activity in the next taxable year. (c) Passive activity defined For purposes of this section— (1) In general The term ‘‘passive activity’’ means any ac- tivity— (A) which involves the conduct of any trade or business, and (B) in which the taxpayer does not materi- ally participate. (2) Passive activity includes any rental activity Except as provided in paragraph (7), the term ‘‘passive activity’’ includes any rental activity. (3) Working interests in oil and gas property (A) In general The term ‘‘passive activity’’ shall not in- clude any working interest in any oil or gas property which the taxpayer holds directly or through an entity which does not limit the liability of the taxpayer with respect to such interest. (B) Income in subsequent years If any taxpayer has any loss for any tax- able year from a working interest in any oil or gas property which is treated as a loss which is not from a passive activity, then any net income from such property (or any property the basis of which is determined in whole or in part by reference to the basis of such property) for any succeeding taxable Page 1635 TITLE 26—INTERNAL REVENUE CODE § 469 year shall be treated as income of the tax- payer which is not from a passive activity. If the preceding sentence applies to the net in- come from any property for any taxable year, any credits allowable under subpart B (other than section 27) or D of part IV of sub- chapter A for such taxable year which are attributable to such property shall be treat- ed as credits not from a passive activity to the extent the amount of such credits does not exceed the regular tax liability of the taxpayer for the taxable year which is allo- cable to such net income. (4) Material participation not required for paragraphs (2) and (3) Paragraphs (2) and (3) shall be applied with- out regard to whether or not the taxpayer ma- terially participates in the activity. (5) Trade or business includes research and ex- perimentation activity For purposes of paragraph (1)(A), the term ‘‘trade or business’’ includes any activity in- volving research or experimentation (within the meaning of section 174). (6) Activity in connection with trade or busi- ness or production of income To the extent provided in regulations, for purposes of paragraph (1)(A), the term ‘‘trade or business’’ includes— (A) any activity in connection with a trade or business, or (B) any activity with respect to which ex- penses are allowable as a deduction under section 212. (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 tax- payer 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 es- tate as one activity. Nothing in the pre- ceding provisions of this subparagraph shall be construed as affecting the determination of whether the taxpayer materially partici- pates with respect to any interest in a lim- ited 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 materi- ally 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 partici- pates. In the case of a joint return, the require- ments of the preceding sentence are satisfied if and only if either spouse separately satis- fies such requirements. For purposes of the preceding sentence, activities in which a spouse materially participates shall be de- termined 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 corpora- tion, the requirements of subparagraph (B) shall be treated as met for any taxable year if more than 50 percent of the gross receipts of such corporation for such tax- able year are derived from real property trades or businesses in which the corpora- tion materially participates. (ii) Personal services as an employee For purposes of subparagraph (B), per- sonal services performed as an employee shall not be treated as performed in real property trades or businesses. The pre- ceding sentence shall not apply if such em- ployee is a 5-percent owner (as defined in section 416(i)(1)(B)) in the employer. (d) Passive activity loss and credit defined For purposes of this section— (1) Passive activity loss The term ‘‘passive activity loss’’ means the amount (if any) by which— (A) the aggregate losses from all passive activities for the taxable year, exceed (B) the aggregate income from all passive activities for such year. (2) Passive activity credit The term ‘‘passive activity credit’’ means the amount (if any) by which— (A) the sum of the credits from all passive activities allowable for the taxable year under— (i) subpart D of part IV of subchapter A, or (ii) subpart B (other than section 27) of such part IV, exceeds (B) the regular tax liability of the tax- payer for the taxable year allocable to all passive activities. (e) Special rules for determining income or loss from a passive activity For purposes of this section— (1) Certain income not treated as income from passive activity In determining the income or loss from any activity— (A) In general There shall not be taken into account— (i) any— Page 1636 TITLE 26—INTERNAL REVENUE CODE § 469 (I) gross income from interest, divi- dends, annuities, or royalties not derived in the ordinary course of a trade or busi- ness, (II) expenses (other than interest) which are clearly and directly allocable to such gross income, and (III) interest expense properly allo- cable to such gross income, and (ii) gain or loss not derived in the ordi- nary course of a trade or business which is attributable to the disposition of prop- erty— (I) producing income of a type de- scribed in clause (i), or (II) held for investment. For purposes of clause (ii), any interest in a passive activity shall not be treated as prop- erty held for investment. (B) Return on working capital For purposes of subparagraph (A), any in- come, gain, or loss which is attributable to an investment of working capital shall be treated as not derived in the ordinary course of a trade or business. (2) Passive losses of certain closely held cor- porations may offset active income (A) In general If a closely held C corporation (other than a personal service corporation) has net ac- tive income for any taxable year, the passive activity loss of such taxpayer for such tax- able year (determined without regard to this paragraph)— (i) shall be allowable as a deduction against net active income, and (ii) shall not be taken into account under subsection (a) to the extent so allowable as a deduction. A similar rule shall apply in the case of any passive activity credit of the taxpayer. (B) Net active income For purposes of this paragraph, the term ‘‘net active income’’ means the taxable in- come of the taxpayer for the taxable year determined without regard to— (i) any income or loss from a passive ac- tivity, and (ii) any item of gross income, expense, gain, or loss described in paragraph (1)(A). (3) Compensation for personal services Earned income (within the meaning of sec- tion 911(d)(2)(A)) shall not be taken into ac- count in computing the income or loss from a passive activity for any taxable year. (4) Dividends reduced by dividends received deduction For purposes of paragraphs (1) and (2), in- come from dividends shall be reduced by the amount of any dividends received deduction under section 243 or 245. (f) Treatment of former passive activities For purposes of this section— (1) In general If an activity is a former passive activity for any taxable year— (A) any unused deduction allocable to such activity under subsection (b) shall be offset against the income from such activity for the taxable year, (B) any unused credit allocable to such ac- tivity under subsection (b) shall be offset against the regular tax liability (computed after the application of paragraph (1)) allo- cable to such activity for the taxable year, and (C) any such deduction or credit remaining after the application of subparagraphs (A) and (B) shall continue to be treated as aris- ing from a passive activity. (2) Change in status of closely held C corpora- tion or personal service corporation If a taxpayer ceases for any taxable year to be a closely held C corporation or personal service corporation, this section shall con- tinue to apply to losses and credits to which this section applied for any preceding taxable year in the same manner as if such taxpayer continued to be a closely held C corporation or personal service corporation, whichever is ap- plicable. (3) Former passive activity The term ‘‘former passive activity’’ means any activity which, with respect to the tax- payer— (A) is not a passive activity for the taxable year, but (B) was a passive activity for any prior taxable year. (g) Dispositions of entire interest in passive ac- tivity If during the taxable year a taxpayer disposes of his entire interest in any passive activity (or former passive activity), the following rules shall apply: (1) Fully taxable transaction (A) In general If all gain or loss realized on such disposi- tion is recognized, the excess of— (i) any loss from such activity for such taxable year (determined after the applica- tion of subsection (b)), over (ii) any net income or gain for such tax- able year from all other passive activities (determined after the application of sub- section (b)), shall be treated as a loss which is not from a passive activity. (B) Subparagraph (A) not to apply to disposi- tion involving related party If the taxpayer and the person acquiring the interest bear a relationship to each other described in section 267(b) or section 707(b)(1), then subparagraph (A) shall not apply to any loss of the taxpayer until the taxable year in which such interest is ac- quired (in a transaction described in sub- paragraph (A)) by another person who does not bear such a relationship to the taxpayer. (C) Income from prior years To the extent provided in regulations, in- come or gain from the activity for preceding Page 1637 TITLE 26—INTERNAL REVENUE CODE § 469 1 So in original. Probably should be ‘‘or’’. taxable years shall be taken into account under subparagraph (A)(ii) for the taxable year to the extent necessary to prevent the avoidance of this section. (2) Disposition by death If an interest in the activity is transferred by reason of the death of the taxpayer— (A) paragraph (1)(A) shall apply to losses described in paragraph (1)(A) to the extent such losses are greater than the excess (if any) of— (i) the basis of such property in the hands of the transferee, over (ii) the adjusted basis of such property immediately before the death of the tax- payer, and (B) any losses to the extent of the excess described in subparagraph (A) shall not be allowed as a deduction for any taxable year. (3) Installment sale of entire interest In the case of an installment sale of an en- tire interest in an activity to which section 453 applies, paragraph (1) shall apply to the portion of such losses for each taxable year which bears the same ratio to all such losses as the gain recognized on such sale during such taxable year bears to the gross profit from such sale (realized or to be realized when payment is completed). (h) Material participation defined For purposes of this section— (1) In general A taxpayer shall be treated as materially participating in an activity only if the tax- payer is involved in the operations of the ac- tivity on a basis which is— (A) regular, (B) continuous, and (C) substantial. (2) Interests in limited partnerships Except as provided in regulations, no inter- est in a limited partnership as a limited part- ner shall be treated as an interest with respect to which a taxpayer materially participates. (3) Treatment of certain retired individuals and surviving spouses A taxpayer shall be treated as materially participating in any farming activity for a taxable year if paragraph (4) or (5) of section 2032A(b) would cause the requirements of sec- tion 2032A(b)(1)(C)(ii) to be met with respect to real property used in such activity if such tax- payer had died during the taxable year. (4) Certain closely held C corporations and personal service corporations A closely held C corporation or personal service corporation shall be treated as materi- ally participating in an activity only if— (A) 1 or more shareholders holding stock representing more than 50 percent (by value) of the outstanding stock of such corporation materially participate in such activity, or (B) in the case of a closely held C corpora- tion (other than a personal service corpora- tion), the requirements of section 465(c)(7)(C) (without regard to clause (iv)) are met with respect to such activity. (5) Participation by spouse In determining whether a taxpayer materi- ally participates, the participation of the spouse of the taxpayer shall be taken into ac- count. (i) $25,000 offset for rental real estate activities (1) In general In the case of any natural person, subsection (a) shall not apply to that portion of the pas- sive activity loss or the deduction equivalent (within the meaning of subsection (j)(5)) of the passive activity credit for any taxable year which is attributable to all rental real estate activities with respect to which such indi- vidual actively participated in such taxable year (and if any portion of such loss or credit arose in another taxable year, in such other taxable year). (2) Dollar limitation The aggregate amount to which paragraph (1) applies for any taxable year shall not ex- ceed $25,000. (3) Phase-out of exemption (A) In general In the case of any taxpayer, the $25,000 amount under paragraph (2) shall be reduced (but not below zero) by 50 percent of the amount by which the adjusted gross income of the taxpayer for the taxable year exceeds $100,000. (B) Special phase-out of rehabilitation credit In the case of any portion of the passive activity credit for any taxable year which is attributable to the rehabilitation credit de- termined under section 47, subparagraph (A) shall be applied by substituting ‘‘$200,000’’ for ‘‘$100,000’’. (C) Exception for low-income housing credit Subparagraph (A) shall not apply to any portion of the passive activity credit for any taxable year which is attributable to any credit determined under section 42. (D) Ordering rule Paragraph (1) shall be applied for any tax- able year— (i) first, to the passive activity loss, (ii) second, to the portion of the passive activity credit to which subparagraph (B) and 1 (C) does not apply, (iii) third, to the portion of such credit to which subparagraph (B) applies, and (iv) then, to the portion of such credit to which subparagraph (C) applies. (E) Adjusted gross income For purposes of this paragraph, adjusted gross income shall be determined without regard to— (i) any amount includible in gross in- come under section 86, (ii) the amounts excludable from gross income under sections 85(c), 135, and 137, (iii) the amounts allowable as a deduc- tion under sections 219, 221, and 250, and Page 1638 TITLE 26—INTERNAL REVENUE CODE § 469 2 So in original. The comma probably should be a period. (iv) any passive activity loss or any loss allowable by reason of subsection (c)(7). (4) Special rule for estates (A) In general In the case of taxable years of an estate ending less than 2 years after the date of the death of the decedent, this subsection shall apply to all rental real estate activities with respect to which such decedent actively par- ticipated before his death. (B) Reduction for surviving spouse’s exemp- tion For purposes of subparagraph (A), the $25,000 amount under paragraph (2) shall be reduced by the amount of the exemption under paragraph (1) (without regard to para- graph (3)) allowable to the surviving spouse of the decedent for the taxable year ending with or within the taxable year of the es- tate. (5) Married individuals filing separately (A) In general Except as provided in subparagraph (B), in the case of any married individual filing a separate return, this subsection shall be ap- plied by substituting— (i) ‘‘$12,500’’ for ‘‘$25,000’’ each place it appears, (ii) ‘‘$50,000’’ for ‘‘$100,000’’ in paragraph (3)(A), and (iii) ‘‘$100,000’’ for ‘‘$200,000’’ in para- graph (3)(B). (B) Taxpayers not living apart This subsection shall not apply to a tax- payer who— (i) is a married individual filing a sepa- rate return for any taxable year, and (ii) does not live apart from his spouse at all times during such taxable year. (6) Active participation (A) In general An individual shall not be treated as ac- tively participating with respect to any in- terest in any rental real estate activity for any period if, at any time during such pe- riod, such interest (including any interest of the spouse of the individual) is less than 10 percent (by value) of all interests in such ac- tivity. (B) No participation requirement for low-in- come housing or rehabilitation credit Paragraphs (1) and (4)(A) shall be applied without regard to the active participation requirement in the case of— (i) any credit determined under section 42 for any taxable year, or (ii) any rehabilitation credit determined under section 47,2 (C) Interest as a limited partner Except as provided in regulations, no in- terest as a limited partner in a limited part- nership shall be treated as an interest with respect to which the taxpayer actively par- ticipates. (D) Participation by spouse In determining whether a taxpayer ac- tively participates, the participation of the spouse of the taxpayer shall be taken into account. (j) Other definitions and special rules For purposes of this section— (1) Closely held C corporation The term ‘‘closely held C corporation’’ means any C corporation described in section 465(a)(1)(B). (2) Personal service corporation The term ‘‘personal service corporation’’ has the meaning given such term by section 269A(b)(1), except that section 269A(b)(2) shall be applied— (A) by substituting ‘‘any’’ for ‘‘more than 10 percent’’, and (B) by substituting ‘‘any’’ for ‘‘50 percent or more in value’’ in section 318(a)(2)(C). A corporation shall not be treated as a per- sonal service corporation unless more than 10 percent of the stock (by value) in such cor- poration is held by employee-owners (within the meaning of section 269A(b)(2), as modified by the preceding sentence). (3) Regular tax liability The term ‘‘regular tax liability’’ has the meaning given such term by section 26(b). (4) Allocation of passive activity loss and credit The passive activity loss and the passive ac- tivity credit (and the $25,000 amount under subsection (i)) shall be allocated to activities, and within activities, on a pro rata basis in such manner as the Secretary may prescribe. (5) Deduction equivalent The deduction equivalent of credits from a passive activity for any taxable year is the amount which (if allowed as a deduction) would reduce the regular tax liability for such taxable year by an amount equal to such cred- its. (6) Special rule for gifts In the case of a disposition of any interest in a passive activity by gift— (A) the basis of such interest immediately before the transfer shall be increased by the amount of any passive activity losses allo- cable to such interest with respect to which a deduction has not been allowed by reason of subsection (a), and (B) such losses shall not be allowable as a deduction for any taxable year. (7) Qualified residence interest The passive activity loss of a taxpayer shall be computed without regard to qualified resi- dence interest (within the meaning of section 163(h)(3)). (8) Rental activity The term ‘‘rental activity’’ means any activ- ity where payments are principally for the use of tangible property. (9) Election to increase basis of property by amount of disallowed credit For purposes of determining gain or loss from a disposition of any property to which Page 1639 TITLE 26—INTERNAL REVENUE CODE § 469 subsection (g)(1) applies, the transferor may elect to increase the basis of such property im- mediately before the transfer by an amount equal to the portion of any unused credit al- lowable under this chapter which reduced the basis of such property for the taxable year in which such credit arose. If the taxpayer elects the application of this paragraph, such portion of the passive activity credit of such taxpayer shall not be allowed for any taxable year. (10) Coordination with section 280A If a passive activity involves the use of a dwelling unit to which section 280A(c)(5) ap- plies for any taxable year, any income, deduc- tion, gain, or loss allocable to such use shall not be taken into account for purposes of this section for such taxable year. (11) Aggregation of members of affiliated groups Except as provided in regulations, all mem- bers of an affiliated group which files a con- solidated return shall be treated as 1 corpora- tion. (12) Special rule for distributions by estates or trusts If any interest in a passive activity is dis- tributed by an estate or trust— (A) the basis of such interest immediately before such distribution shall be increased by the amount of any passive activity losses allocable to such interest, and (B) such losses shall not be allowable as a deduction for any taxable year. (k) Separate application of section in case of publicly traded partnerships (1) In general This section shall be applied separately with respect to items attributable to each publicly traded partnership (and subsection (i) shall not apply with respect to items attributable to any such partnership). The preceding sentence shall not apply to any credit determined under section 42, or any rehabilitation credit deter- mined under section 47, attributable to a pub- licly traded partnership to the extent the amount of any such credits exceeds the reg- ular tax liability attributable to income from such partnership. (2) Publicly traded partnership For purposes of this section, the term ‘‘pub- licly traded partnership’’ means any partner- ship if— (A) interests in such partnership are trad- ed on an established securities market, or (B) interests in such partnership are read- ily tradable on a secondary market (or the substantial equivalent thereof). (3) Coordination with subsection (g) For purposes of subsection (g), a taxpayer shall not be treated as having disposed of his entire interest in an activity of a publicly traded partnership until he disposes of his en- tire interest in such partnership. (4) Application to regulated investment compa- nies For purposes of this section, a regulated in- vestment company (as defined in section 851) holding an interest in a qualified publicly traded partnership (as defined in section 851(h)) shall be treated as a taxpayer described in subsection (a)(2) with respect to items at- tributable to such interest. (l) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out provisions of this section, including regula- tions— (1) which specify what constitutes an activ- ity, material participation, or active partici- pation for purposes of this section, (2) which provide that certain items of gross income will not be taken into account in de- termining income or loss from any activity (and the treatment of expenses allocable to such income), (3) requiring net income or gain from a lim- ited partnership or other passive activity to be treated as not from a passive activity, (4) which provide for the determination of the allocation of interest expense for purposes of this section, and (5) which deal with changes in marital status and changes between joint returns and sepa- rate returns. (Added Pub. L. 99–514, title V, § 501(a), Oct. 22, 1986, 100 Stat. 2233; amended Pub. L. 100–203, title X, § 10212(a), Dec. 22, 1987, 101 Stat. 1330–405; Pub. L. 100–647, title I, § 1005(a)(1)–(9), (11), (12), title II, § 2004(g), title VI, § 6009(c)(3), Nov. 10, 1988, 102 Stat. 3387–3389, 3603, 3690; Pub. L. 101–239, title VII, § 7109(a), Dec. 19, 1989, 103 Stat. 2322; Pub. L. 101–508, title XI, §§ 11704(a)(6), 11813(b)(16), Nov. 5, 1990, 104 Stat. 1388–518, 1388–555; Pub. L. 103–66, title XIII, § 13143(a), (b), Aug. 10, 1993, 107 Stat. 440, 441; Pub. L. 104–188, title I, §§ 1704(d)(1), (e)(1), 1807(c)(4), Aug. 20, 1996, 110 Stat. 1878, 1902; Pub. L. 105–277, div. J, title IV, § 4003(a)(2)(D), Oct. 21, 1998, 112 Stat. 2681–908; Pub. L. 106–554, § 1(a)(7) [title I, § 101(b)], Dec. 21, 2000, 114 Stat. 2763, 2763A–599; Pub. L. 107–16, title IV, § 431(c)(3), June 7, 2001, 115 Stat. 68; Pub. L. 107–147, title IV, § 412(a), Mar. 9, 2002, 116 Stat. 53; Pub. L. 108–357, title I, § 102(d)(5), title III, § 331(g), Oct. 22, 2004, 118 Stat. 1429, 1477; Pub. L. 113–295, div. A, title II, § 221(a)(41)(G), (60)(A), Dec. 19, 2014, 128 Stat. 4044, 4047; Pub. L. 115–97, title I, §§ 13305(b)(1), 14202(b)(3), Dec. 22, 2017, 131 Stat. 2126, 2216; Pub. L. 115–141, div. U, title IV, § 401(d)(1)(D)(ii), (5)(B)(i)–(iii), Mar. 23, 2018, 132 Stat. 1206, 1210; Pub. L. 116–260, div. EE, title I, § 104(b)(2)(H), Dec. 27, 2020, 134 Stat. 3041; Pub. L. 117–2, title IX, § 9042(b)(8), Mar. 11, 2021, 135 Stat. 122.) Editorial Notes AMENDMENTS 2021—Subsec. (i)(3)(E)(ii). Pub. L. 117–2 substituted ‘‘85(c), 135, and 137’’ for ‘‘135 and 137’’. 2020—Subsec. (i)(3)(E)(iii). Pub. L. 116–260 struck out ‘‘222,’’ after ‘‘221,’’. 2018—Subsecs. (c)(3)(B), (d)(2)(A)(ii). Pub. L. 115–141, § 401(d)(1)(D)(ii), substituted ‘‘27’’ for ‘‘27(a)’’. Subsec. (i)(3)(C). Pub. L. 115–141, § 401(d)(5)(B)(i), re- designated subpar. (D) as (C) and struck out former subpar. (C). Prior to amendment, text of subpar. (C) read as follows: ‘‘Subparagraph (A) shall not apply to any portion of the passive activity loss for any taxable year which is attributable to the commercial revital- ization deduction under section 1400I.’’ Page 1640 TITLE 26—INTERNAL REVENUE CODE § 469 Subsec. (i)(3)(D). Pub. L. 115–141, § 401(d)(5)(B)(i), (ii), redesignated subpar. (E) as (D) and amended it gen- erally. Prior to amendment, subpar. related to ordering rules to reflect exceptions and separate phase-outs. Former subpar. (D) redesignated (C). Subsec. (i)(3)(E), (F). Pub. L. 115–141, § 401(d)(5)(B)(i), redesignated subpar. (F) as (E). Former subpar. (E) re- designated (D). Subsec. (i)(6)(B). Pub. L. 115–141, § 401(d)(5)(B)(iii)(I), substituted ‘‘or rehabilitation credit’’ for ‘‘, rehabilitation credit, or commercial revitalization deduction’’ in heading. Subsec. (i)(6)(B)(iii). Pub. L. 115–141, § 401(d)(5)(B)(iii)(II)–(IV), struck out cl. (iii) which read as follows: ‘‘any deduction under section 1400I (relating to commercial revitalization deduction).’’ 2017—Subsec. (i)(3)(F)(iii). Pub. L. 115–97, § 14202(b)(3), substituted ‘‘222, and 250’’ for ‘‘and 222’’. Pub. L. 115–97, § 13305(b)(1), struck out ‘‘199,’’ after ‘‘sections’’. 2014—Subsec. (e)(4). Pub. L. 113–295, § 221(a)(41)(G), struck out ‘‘, 244,’’ after ‘‘section 243’’. Subsec. (m). Pub. L. 113–295, § 221(a)(60)(A), struck out subsec. (m) which related to a phase-in of disallowance of losses and credits for interest held before the date of enactment of the Tax Reform Act of 1986. 2004—Subsec. (i)(3)(F)(iii). Pub. L. 108–357, § 102(d)(5), inserted ‘‘199,’’ before ‘‘219,’’. Subsec. (k)(4). Pub. L. 108–357, § 331(g), added par. (4). 2002—Subsec. (i)(3)(E)(ii) to (iv). Pub. L. 107–147 added cls. (ii) to (iv) and struck out former cls. (ii) to (iv) which read as follows: ‘‘(ii) second to the portion of the passive activity credit to which subparagraph (B) or (D) does not apply, ‘‘(iii) third to the portion of such credit to which sub- paragraph (B) applies, ‘‘(iv) fourth to the portion of such loss to which sub- paragraph (C) applies, and’’. 2001—Subsec. (i)(3)(F)(iii). Pub. L. 107–16 substituted ‘‘, 221, and 222’’ for ‘‘and 221’’. 2000—Subsec. (i)(3)(C) to (F). Pub. L. 106–554, § 1(a)(7) [title I, § 101(b)(1), (2)], added subpar. (C), redesignated former subpars. (C) to (E) as (D) to (F), respectively, and generally amended heading and text of subpar. (E), as redesignated. Prior to amendment, text read as fol- lows: ‘‘If subparagraph (B) or (C) applies for any taxable year, paragraph (1) shall be applied— ‘‘(i) first to the passive activity loss, ‘‘(ii) second to the portion of the passive activity credit to which subparagraph (B) or (C) does not apply, ‘‘(iii) third to the portion of such credit to which subparagraph (B) applies, and ‘‘(iv) then to the portion of such credit to which subparagraph (C) applies.’’ Subsec. (i)(6)(B). Pub. L. 106–554, § 1(a)(7) [title I, § 101(b)(3)(B)], substituted ‘‘, rehabilitation credit, or commercial revitalization deduction’’ for ‘‘or rehabili- tation credit’’ in heading. Subsec. (i)(6)(B)(iii). Pub. L. 106–554, § 1(a)(7) [title I, § 101(b)(3)(A)], added cl. (iii). 1998—Subsec. (i)(3)(E)(iii). Pub. L. 105–277 amended cl. (iii) generally. Prior to amendment, cl. (iii) read as fol- lows: ‘‘any amount allowable as a deduction under sec- tion 219, and’’. 1996—Subsec. (c)(3)(B). Pub. L. 104–188, § 1704(d)(1), in- serted at end ‘‘If the preceding sentence applies to the net income from any property for any taxable year, any credits allowable under subpart B (other than section 27(a)) or D of part IV of subchapter A for such taxable year which are attributable to such property shall be treated as credits not from a passive activity to the ex- tent the amount of such credits does not exceed the regular tax liability of the taxpayer for the taxable year which is allocable to such net income.’’ Subsec. (g)(1)(A). Pub. L. 104–188, § 1704(e)(1), reen- acted heading without change and amended text gen- erally. Prior to amendment, text read as follows: ‘‘If all gain or loss realized on such disposition is recognized, the excess of— ‘‘(i) the sum of— ‘‘(I) any loss from such activity for such taxable year (determined after application of subsection (b)), plus ‘‘(II) any loss realized on such disposition, over ‘‘(ii) net income or gain for such taxable year from all passive activities (determined without regard to losses described in clause (i)), shall be treated as a loss which is not from a passive activity.’’ Subsec. (i)(3)(E)(ii). Pub. L. 104–188, § 1807(c)(4), amended cl. (ii) generally. Prior to amendment, cl. (ii) read as follows: ‘‘the amount excludable from gross in- come under section 135,’’. 1993—Subsec. (c)(2). Pub. L. 103–66, § 13143(b)(1), sub- stituted ‘‘Except as provided in paragraph (7), the’’ for ‘‘The’’. Subsec. (c)(7). Pub. L. 103–66, § 13143(a), added par. (7). Subsec. (i)(3)(E)(iv). Pub. L. 103–66, § 13143(b)(2), in- serted ‘‘or any loss allowable by reason of subsection (c)(7)’’ after ‘‘loss’’. 1990—Subsec. (i)(3)(B), (6)(B)(ii). Pub. L. 101–508, § 11813(b)(16)(A), substituted ‘‘rehabilitation credit de- termined under section 47’’ for ‘‘rehabilitation invest- ment credit (within the meaning of section 48(o))’’. Subsec. (k)(1). Pub. L. 101–508, § 11813(b)(16)(B), sub- stituted ‘‘rehabilitation credit determined under sec- tion 47’’ for ‘‘rehabilitation investment credit (within the meaning of section 48(o))’’. Subsec. (m)(3)(A). Pub. L. 101–508, § 11704(a)(6), sub- stituted ‘‘pre-enactment’’ for ‘‘preenactment’’. 1989—Subsec. (i)(3)(B), (C). Pub. L. 101–239 added sub- pars. (B) and (C) and struck out former subpars. (B) and (C) which read as follows: ‘‘(B) SPECIAL PHASE-OUT OF LOW-INCOME HOUSING AND REHABILITATION CREDITS.—In the case of any portion of the passive activity credit for any taxable year which is attributable to any credit to which paragraph (6)(B) applies, subparagraph (A) shall be applied by sub- stituting ‘$200,000’ for ‘$100,000’. ‘‘(C) ORDERING RULE TO REFLECT SEPARATE PHASE- OUTS.—If subparagraph (B) applies for any taxable year, paragraph (1) shall be applied— ‘‘(i) first to the passive activity loss, ‘‘(ii) second to the portion of the passive activity credit to which subparagraph (B) does not apply, and ‘‘(iii) then to the portion of such credit to which subparagraph (B) applies.’’ Subsec. (i)(3)(D), (E). Pub. L. 101–239 added subpar. (D) and redesignated former subpar. (D) as (E). 1988—Subsec. (e)(1)(A)(ii). Pub. L. 100–647, § 1005(a)(1), inserted ‘‘not derived in the ordinary course of a trade or business which is’’ after ‘‘gain or loss’’. Subsec. (g)(1)(A). Pub. L. 100–647, § 1005(a)(2)(A), amended subpar. (A) generally. Prior to amendment, subpar. (A) read as follows: ‘‘If all gain or loss realized on such disposition is recognized, any loss from such activity which has not previously been allowed as a de- duction (and in the case of a passive activity for the taxable year, any loss realized on such disposition) shall not be treated as a passive activity loss and shall be allowable as a deduction against income in the fol- lowing order: ‘‘(i) Income or gain from the passive activity for the taxable year (including any gain recognized on the disposition). ‘‘(ii) Net income or gain for the taxable year from all passive activities. ‘‘(iii) Any other income or gain.’’ Subsec. (g)(1)(C). Pub. L. 100–647, § 1005(a)(2)(B), sub- stituted ‘‘Income from prior years’’ for ‘‘Coordination with section 1211’’ in heading and amended text gen- erally. Prior to amendment, text read as follows: ‘‘In the case of any loss realized on the disposition of an in- terest in a passive activity, section 1211 shall be applied before subparagraph (A) is applied.’’ Subsec. (g)(2)(A). Pub. L. 100–647, § 1005(a)(3), sub- stituted ‘‘paragraph (1)(A)’’ for ‘‘paragraph (1)’’ and ‘‘to losses described in paragraph (1)(A)’’ for ‘‘to such losses’’. Page 1641 TITLE 26—INTERNAL REVENUE CODE § 469 Subsec. (g)(3). Pub. L. 100–647, § 1005(a)(4), substituted ‘‘(realized or to be realized’’ for ‘‘realized (or to be real- ized)’’ and ‘‘is completed)’’ for ‘‘is completed’’. Subsec. (h)(4). Pub. L. 100–647, § 1005(a)(5), inserted ‘‘only’’ before ‘‘if’’. Subsec. (i)(1). Pub. L. 100–647, § 1005(a)(6), substituted ‘‘in such taxable year (and if any portion of such loss or credit arose in another taxable year, in such other taxable year)’’ for ‘‘in the taxable year in which such portion of such loss or credit arose’’. Subsec. (i)(3)(D). Pub. L. 100–647, § 6009(c)(3), added cl. (ii) and redesignated former cls. (ii) and (iii) as (iii) and (iv), respectively. Subsec. (i)(6)(C). Pub. L. 100–647, § 1005(a)(7), sub- stituted ‘‘Except as provided in regulations, no’’ for ‘‘No’’. Subsec. (j)(6)(A). Pub. L. 100–647, § 1005(a)(8), inserted ‘‘with respect to which a deduction has not been al- lowed by reason of subsection (a)’’ after ‘‘to such inter- est’’. Subsec. (j)(10), (11). Pub. L. 100–647, § 1005(a)(9), added pars. (10) and (11). Subsec. (j)(12). Pub. L. 100–647, § 1005(a)(11), added par. (12). Subsec. (k)(3). Pub. L. 100–647, § 2004(g), added par. (3). Subsec. (m). Pub. L. 100–647, § 1005(a)(12), substituted ‘‘interest’’ for ‘‘interests’’ in heading. Subsec. (m)(1). Pub. L. 100–647, § 1005(a)(12), added par. (1) and struck out former par. (1) which read as follows: ‘‘In the case of any passive activity loss or credit for any taxable year beginning in calendar years 1987 through 1990 which— ‘‘(A) is attributable to a pre-enactment interest, but ‘‘(B) is not attributable to a carryforward to such taxable year of any loss or credit which was dis- allowed under this section for a preceding taxable year, there shall be disallowed under subsection (a) only the applicable percentage of the amount which (but for this subsection) would have been disallowed under sub- section (a) for such taxable year.’’ Subsec. (m)(2). Pub. L. 100–647, § 1005(a)(12), added par. (2) and struck out former par. (2) which resulted in sub- stituting ‘‘65’’, ‘‘40’’, ‘‘20’’, and ‘‘10’’ for ‘‘35’’, ‘‘60’’, ‘‘80’’, and ‘‘90’’, respectively, in second column. Subsec. (m)(3)(A). Pub. L. 100–647, § 1005(a)(12), added subpar. (A) and struck out former subpar. (A) which read as follows: ‘‘The portion of the passive activity loss for any taxable year which is attributable to pre- enactment interests shall be equal to the lesser of— ‘‘(i) the passive activity loss for such taxable year, or ‘‘(ii) the passive activity loss for such taxable year determined by taking into account only pre-enact- ment interests. For purposes of this subparagraph, the deduction equiv- alent (within the meaning of subsection (j)(5)) of a pas- sive activity credit shall be taken into account.’’ 1987—Subsecs. (k) to (m). Pub. L. 100–203 added sub- sec. (k) and redesignated former subsecs. (k) and (l) as (l) and (m), respectively. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2021 AMENDMENT Amendment by Pub. L. 117–2 applicable to taxable years beginning after Dec. 31, 2019, see section 9042(c) of Pub. L. 117–2, set out as a note under section 74 of this title. EFFECTIVE DATE OF 2020 AMENDMENT Amendment by Pub. L. 116–260 applicable to taxable years beginning after Dec. 31, 2020, see section 104(c) of div. EE of Pub. L. 116–260, set out as a note under sec- tion 25A of this title. EFFECTIVE DATE OF 2017 AMENDMENT Amendment by section 13305(b)(1) of Pub. L. 115–97 ap- plicable to taxable years beginning after Dec. 31, 2017, except as provided by transition rule, see section 13305(c) of Pub. L. 115–97, set out as a note under section 74 of this title. Amendment by section 14202(b)(3) of Pub. L. 115–97 ap- plicable to taxable years beginning after Dec. 31, 2017, see section 14202(c) of Pub. L. 115–97, set out as a note under section 172 of this title. EFFECTIVE DATE OF 2014 AMENDMENT Amendment by section 221(a)(41)(G) of Pub. L. 113–295 not applicable to preferred stock issued before Oct. 1, 1942 (determined in the same manner as under section 247 of this title as in effect before its repeal by Pub. L. 113–295), see section 221(a)(41)(K) of Pub. L. 113–295, set out as a note under section 172 of this title. Except as otherwise provided in section 221(a) of Pub. L. 113–295, amendment by Pub. L. 113–295 effective Dec. 19, 2014, subject to a savings provision, see section 221(b) of Pub. L. 113–295, set out as a note under section 1 of this title. EFFECTIVE DATE OF 2004 AMENDMENT Amendment by section 102(d)(5) of Pub. L. 108–357 ap- plicable to taxable years beginning after Dec. 31, 2004, see section 102(e) of Pub. L. 108–357, set out as a note under section 56 of this title. Pub. L. 108–357, title III, § 331(h), Oct. 22, 2004, 118 Stat. 1477, provided that: ‘‘The amendments made by this section [amending this section and sections 851 and 7704 of this title] shall apply to taxable years beginning after the date of the enactment of this Act [Oct. 22, 2004].’’ EFFECTIVE DATE OF 2002 AMENDMENT Amendment by Pub. L. 107–147 effective as if included in the provisions of the Community Renewal Tax Relief Act of 2000 [H.R. 5662, as enacted by Pub. L. 106–554], to which such amendment relates, see section 412(e) of Pub. L. 107–147, set out as a note under section 151 of this title. EFFECTIVE DATE OF 2001 AMENDMENT Amendment by Pub. L. 107–16 applicable to payments made in taxable years beginning after Dec. 31, 2001, see section 431(d) of Pub. L. 107–16, set out as a note under section 62 of this title. EFFECTIVE DATE OF 1998 AMENDMENT Amendment by Pub. L. 105–277 effective as if included in the provision of the Taxpayer Relief Act of 1997, Pub. L. 105–34, to which such amendment relates, see section 4003(l) of Pub. L. 105–277, set out as a note under section 86 of this title. EFFECTIVE DATE OF 1996 AMENDMENT Pub. L. 104–188, title XVII, § 1704(d)(2), Aug. 20, 1996, 110 Stat. 1878, provided that: ‘‘The amendment made by paragraph (1) [amending this section] shall apply to taxable years beginning after December 31, 1986.’’ Pub. L. 104–188, title XVII, § 1704(e)(2), Aug. 20, 1996, 110 Stat. 1879, provided that: ‘‘The amendment made by paragraph (1) [amending this section] shall apply to taxable years beginning after December 31, 1986.’’ Amendment by section 1807(c)(4) of Pub. L. 104–188 ap- plicable to taxable years beginning after Dec. 31, 1996, see section 1807(e) of Pub. L. 104–188, set out as an Ef- fective Date note under section 23 of this title. EFFECTIVE DATE OF 1993 AMENDMENT Pub. L. 103–66, title XIII, § 13143(c), Aug. 10, 1993, 107 Stat. 441, provided that: ‘‘The amendments made by this section [amending this section] shall apply to tax- able years beginning after December 31, 1993.’’ EFFECTIVE DATE OF 1990 AMENDMENT Amendment by section 11813(b)(16) of Pub. L. 101–508 applicable to property placed in service after Dec. 31, 1990, but not applicable to any transition property (as Page 1642 TITLE 26—INTERNAL REVENUE CODE § 469 defined in section 49(e) of this title), any property with respect to which qualified progress expenditures were previously taken into account under section 46(d) of this title, and any property described in section 46(b)(2)(C) of this title, as such sections were in effect on Nov. 4, 1990, see section 11813(c) of Pub. L. 101–508, set out as a note under section 45K of this title. EFFECTIVE DATE OF 1989 AMENDMENT Pub. L. 101–239, title VII, § 7109(b), Dec. 19, 1989, 103 Stat. 2322, provided that: ‘‘(1) IN GENERAL.—Except as provided in paragraph (2), the amendments made by this section [amending this section] shall apply to property placed in service after December 31, 1989, in taxable years ending after such date. ‘‘(2) SPECIAL RULE WHERE INTEREST HELD IN PASS-THRU ENTITY.—In the case of a taxpayer who holds an indi- rect interest in property described in paragraph (1), the amendments made by this section shall apply only if such interest is acquired after December 31, 1989.’’ EFFECTIVE DATE OF 1988 AMENDMENT Amendment by section 1005(a)(1)–(9), (11), (12) of Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title. Amendment by section 2004(g) of Pub. L. 100–647 effec- tive, except as otherwise provided, as if included in the provisions of the Revenue Act of 1987, Pub. L. 100–203, title X, to which such amendment relates, see section 2004(u) of Pub. L. 100–647, set out as a note under sec- tion 56 of this title. Amendment by section 6009(c)(3) of Pub. L. 100–647 ap- plicable to taxable years beginning after Dec. 31, 1989, see section 6009(d) of Pub. L. 100–647, set out as a note under section 86 of this title. EFFECTIVE DATE OF 1987 AMENDMENT Amendment by Pub. L. 100–203 effective as if included in the amendments made by section 501 of the Tax Re- form Act of 1986, Pub. L. 99–514, see section 10212(c) of Pub. L. 100–203, set out as a note under section 58 of this title. EFFECTIVE DATE Pub. L. 99–514, title V, § 501(c), Oct. 22, 1986, 100 Stat. 2241, as amended by Pub. L. 100–647, title I, § 1005(a)(10), title IV, § 4003(b)(2), Nov. 10, 1988, 102 Stat. 3388, 3644, provided that: ‘‘(1) IN GENERAL.—The amendments made by this sec- tion [enacting this section] shall apply to taxable years beginning after December 31, 1986. ‘‘(2) SPECIAL RULE FOR CARRYOVERS.—The amend- ments made by this section shall not apply to any loss, deduction, or credit carried to a taxable year beginning after December 31, 1986, from a taxable year beginning before January 1, 1987. ‘‘[(3) Repealed. Pub. L. 100–647, title IV, § 4003(b)(2), Nov. 10, 1988, 102 Stat. 3644.] ‘‘(4) INCOME FROM SALES OF PASSIVE ACTIVITIES IN TAX- ABLE YEARS BEGINNING BEFORE JANUARY 1, 1987.—If— ‘‘(A) gain is recognized in a taxable year beginning after December 31, 1986, from a sale or exchange of an interest in an activity in a taxable year beginning be- fore January 1, 1987, and ‘‘(B) such gain would have been treated as gain from a passive activity had section 469 of the Internal Revenue Code of 1986 (as added by this section) been in effect for the taxable year in which the sale or ex- change occurred and for all succeeding taxable years, then such gain shall be treated as gain from a passive activity for purposes of such section.’’ SAVINGS PROVISION Amendment by section 401(d)(5)(B)(i)–(iii) of Pub. L. 115–141 not applicable to certain qualified community assets acquired, wages paid or incurred, qualified revi- talization buildings placed in service, or property ac- quired before Jan. 1, 2010, see section 401(d)(5)(C) of Pub. L. 115–141, set out as a note under former section 1400E of this title. For provisions that nothing in amendment by Pub. L. 115–141 be construed to affect treatment of certain transactions occurring, property acquired, or items of income, loss, deduction, or credit taken into account prior to Mar. 23, 2018, for purposes of determining li- ability for tax for periods ending after Mar. 23, 2018, see section 401(e) of Pub. L. 115–141, set out as a note under section 23 of this title. For provisions that nothing in amendment by section 11813(b)(16) of Pub. L. 101–508 be construed to affect treatment of certain transactions occurring, property acquired, or items of income, loss, deduction, or credit taken into account prior to Nov. 5, 1990, for purposes of determining liability for tax for periods ending after Nov. 5, 1990, see section 11821(b) of Pub. L. 101–508, set out as a note under section 45K of this title. AMOUNTS ATTRIBUTABLE TO ACTIVITIES SUBJECT TO LIMITATIONS UNDER SECTION 469 TREATED AS DEDUC- TION ALLOCABLE TO SUCH ACTIVITY Pub. L. 100–647, title I, § 1005(c)(11), Nov. 10, 1988, 102 Stat. 3392, provided that: ‘‘If— ‘‘(A) any amount was disallowed as a deduction under section 163(d) of the Internal Revenue Code of 1954 [now 1986] (as in effect on the day before the date of the enactment of the Reform Act [Oct. 22, 1986]), ‘‘(B) such amount would (but for this paragraph) be treated as investment interest paid or accrued by the taxpayer in the taxpayer’s first taxable year begin- ning after December 31, 1986, and ‘‘(C) the taxpayer makes an election under this paragraph at such time and in such manner as the Secretary of the Treasury or his delegate shall pre- scribe, to the extent such amount is attributable to an activ- ity subject to the limitations of section 469 of the 1986 Code, such amount shall not be treated as investment interest but shall be treated as a deduction allocable to such activity for such first taxable year. [Former] Sub- section (m) of section 469 of the 1986 Code and section 501(c)(2) of the Reform Act [Pub. L. 99–514, set out as an Effective Date note above] shall not apply to any amount so treated.’’ TRANSITIONAL RULE FOR LOW-INCOME HOUSING Pub. L. 99–514, title V, § 502, Oct. 22, 1986, 100 Stat. 2241, as amended by Pub. L. 99–509, title VIII, § 8073(a), Oct. 21, 1986, 100 Stat. 1965; Pub. L. 100–647, title I, § 1005(b), Nov. 10, 1988, 102 Stat. 3389, provided that: ‘‘(a) GENERAL RULE.—Any loss sustained by a quali- fied investor with respect to an interest in a qualified low-income housing project for any taxable year in the relief period shall not be treated as a loss from a pas- sive activity for purposes of section 469 of the Internal Revenue Code of 1986. ‘‘(b) RELIEF PERIOD.—For purposes of subsection (a), the term ‘relief period’ means the period beginning with the taxable year in which the investor made his initial investment in the qualified low-income housing project and ending with whichever of the following is the earliest— ‘‘(1) the 6th taxable year after the taxable year in which the investor made his initial investment, ‘‘(2) the 1st taxable year after the taxable year in which the investor is obligated to make his last in- vestment, or ‘‘(3) the taxable year preceding the 1st taxable year for which such project ceased to be a qualified low-in- come housing project. ‘‘(c) QUALIFIED LOW-INCOME HOUSING PROJECT.—For purposes of this section, the term ‘qualified low-income housing project’ means any project if— ‘‘(1) such project meets the requirements of clause (i), (ii), (iii), or (iv) of section 1250(a)(1)(B) [of the In- Page 1643 TITLE 26—INTERNAL REVENUE CODE § 470 ternal Revenue Code of 1986] as of the date placed in service and for each taxable year thereafter which be- gins after 1986 and for which a passive loss may be al- lowable with respect to such project, ‘‘(2) the operator certifies to the Secretary of the Treasury or his delegate that such project met the re- quirements of paragraph (1) on the date of the enact- ment of this Act [Oct. 22, 1986] (or, if later, when placed in service) and annually thereafter, ‘‘(3) such project is constructed or acquired pursu- ant to a binding written contract entered into on or before August 16, 1986, and ‘‘(4) such project is placed in service before January 1, 1989. ‘‘(d) QUALIFIED INVESTOR.—For purposes of this sec- tion— ‘‘(1) IN GENERAL.—The term ‘qualified investor’ means any natural person who holds (directly or through 1 or more entities) an interest in a qualified low-income housing project— ‘‘(A) if— ‘‘(i) in the case of a project placed in service on or before August 16, 1986, such person held an in- terest in such project on August 16, 1986, and such person made his initial investment after Decem- ber 31, 1983, or ‘‘(ii) in the case of a project placed in service after August 16, 1986, such person made his initial investment after December 31, 1983, and such per- son held an interest in such project on December 31, 1986, and ‘‘(B) if such investor is required to make pay- ments after December 31, 1986, of 50 percent or more of the total original obligated investment for such interest. For purposes of subparagraph (A), a person shall be treated as holding an interest on August 16, 1986, or December 31, 1986, if on such date such person had a binding contract to acquire such interest. ‘‘(2) TREATMENT OF ESTATES.—The estate of a dece- dent shall succeed to the treatment under this sec- tion of the decedent but only with respect to the 1st 2 taxable years of such estate ending after the date of the decedent’s death. ‘‘(3) SPECIAL RULE FOR CERTAIN PARTNERSHIPS.—In the case of any property which is held by a partner- ship— ‘‘(A) which placed such property in service on or after December 31, 1985, and before August 17, 1986, and continuously held such property through the close of the taxable year for which the determina- tion is being made, and ‘‘(B) which was not treated as a new partnership or as terminated at any time on or after the date on which such property was placed in service and through the close of the taxable year for which the determination is being made, paragraph (1)(A)(i) shall be applied by substituting ‘December 31, 1988’ for ‘August 16, 1986’ the 2nd place it appears. ‘‘(4) SPECIAL RULE FOR CERTAIN RURAL HOUSING.—In the case of any interest in a qualified low-income housing project which— ‘‘(A) is assisted under section 515 of the Housing Act of 1949 [42 U.S.C. 1485] (relating to the Farmers’ Home Administration Program), and ‘‘(B) is located in a town with a population of less than 10,000 and which is not part of a metropolitan statistical area, paragraph (1)(B) shall be applied by substituting ‘35 percent’ for ‘50 percent’ and subsection (b)(1) shall be applied by substituting ‘5th taxable year’ for ‘6th tax- able year’. The preceding sentence shall not apply to any interest unless, on December 31, 1986, at least one-half of the number of payments required with re- spect to such interest remain to be paid. ‘‘(e) SPECIAL RULES.— ‘‘(1) WHERE MORE THAN 1 BUILDING IN PROJECT.—If there is more than 1 building in any project, the de- termination of when such project is placed in service shall be based on when the 1st building in such project is placed in service. ‘‘(2) ONLY CASH AND OTHER PROPERTY TAKEN INTO AC- COUNT.—In determining the amount any person in- vests in (or is obligated to invest in) any interest, only cash and other property shall be taken into ac- count. ‘‘(3) COORDINATION WITH CREDIT.—No low-income housing credit shall be determined under section 42 of the Internal Revenue Code of 1986 with respect to any project with respect to which any person has been al- lowed any benefit under this section.’’ [Pub. L. 99–509, title VIII, § 8073(b), Oct. 21, 1986, 100 Stat. 1965, provided that: ‘‘The amendment made by subsection (a) [amending section 502 of Pub. L. 99–514, set out above] shall take effect as if included in section 502 of the Tax Reform Act of 1986 on the date of its en- actment [Oct. 22, 1986].’’] § 470. Limitation on deductions allocable to prop- erty used by governments or other tax-ex- empt entities (a) Limitation on losses Except as otherwise provided in this section, a tax-exempt use loss for any taxable year shall not be allowed. (b) Disallowed loss carried to next year Any tax-exempt use loss with respect to any tax-exempt use property which is disallowed under subsection (a) for any taxable year shall be treated as a deduction with respect to such property in the next taxable year. (c) Definitions For purposes of this section— (1) Tax-exempt use loss The term ‘‘tax-exempt use loss’’ means, with respect to any taxable year, the amount (if any) by which— (A) the sum of— (i) the aggregate deductions (other than interest) directly allocable to a tax-ex- empt use property, plus (ii) the aggregate deductions for interest properly allocable to such property, exceed (B) the aggregate income from such prop- erty. (2) Tax-exempt use property (A) In general The term ‘‘tax-exempt use property’’ has the meaning given to such term by section 168(h), except that such section shall be ap- plied— (i) without regard to paragraphs (1)(C) and (3) thereof, and (ii) as if section 197 intangible property (as defined in section 197), and property de- scribed in paragraph (1)(B) or (2) of section 167(f), were tangible property. (B) Exception for partnerships Such term shall not include any property which would (but for this subparagraph) be tax-exempt use property solely by reason of section 168(h)(6). (C) Cross reference For treatment of partnerships as leases to which section 168(h) applies, see section 7701(e). (d) Exception for certain leases This section shall not apply to any lease of property which meets the requirements of all of the following paragraphs: