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Taxation: Schedule E given the material participation rules

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Problem
Richie is a wealthy rancher in Texas. He operates his ranch through a grantor trust set up by his grandparents. Richie does not like to get his hands dirty, so he hires a professional management company to run the ranch. The property generated a $500,000 loss this year. Can Richie deduct this loss on his Schedule E given the material participation rules of Sec. 469 of the Internal Revenue Code?

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Solution Summary

Your tutorial is 569 words including a conclusion and quotes from the IRS site on this issue.

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Discussion:
So are you see in the sentence in the "substantially all" section, involvement of an employee or non-owner could cause the test to fail.
Since he does not like to get his hands dirty, my guess is that he will not be able to show over 500 hours of work on the ranch or substantial, continuous and regular effort at the ranch.
I believe he fails the test and may not deduct the losses as nonpassive.

REFERENCE

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Passive-Activity-Loss-ATG-Chapter-4-Material-Participation

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Your tutorial is 569 words including a conclusion and quotes from the IRS site on this issue.
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The material participation rules are quoted from www.irs.gov below:

"Passive Activity Loss ATG - Chapter 4, Material Participation

In a Nutshell

A taxpayer materially participates in an activity if he or she works on a regular, continuous and ...

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Carol Sargent, PhD
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  • MSc, University of Virginia
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