On August 19, 2016, IRS issued a Technical Advice Memorandum which ruled in favor of outpatient surgery income of a physician as a passive activity and as such its income could be offset against passive real estate losses.
Generally passive activity losses (PAL) cannot be offset against active or earned income or portfolio. PAL is defined by IRS code as any trade or business activity where the taxpayer does not materially participate. Real estate income by default is generally considered as passive. Thus, a taxpayer is required to group all passive activities together and net all passive income and losses. However, if there is still a net loss such loss cannot be netted again non-passive or earned income but can be carried for future offset.
This ruling is not a blanket allowance to treat all outpatient activity as passive activity. In the given circumstance, the Physician had significant participation in other medical practices which he materially participated, owned and were the sources of his vast majority of income. He had an insignificant ownership interest in an outpatient surgery center. The Physician used the outpatient center as an alternative location for his patients and it had no impact on his income generated from other practices. The IRS initially re-grouped the outpatient activity along with other medical practices and disallowed the passive treatment. However, given the facts briefly described above, the court ruled in favor of the Physician’s treatment of the passive activity and allowed offsetting of his real estate passive losses with the outpatient income.
Individual circumstances can vary for a taxpayer. We suggest consult with your tax professional on how this ruling may apply to your situation. Please read this white paper along with papers on Real Estate Rental Income, and Implication of Real Estate in a Partnership Vs S-Corporation included on this website at www.shahcpaus.com/real-estate-rental-and-construction/. If you have any further question, feel free to contact Kislay Shah CPA at 646-328-1326 or firstname.lastname@example.org.