How to Create a 469(c)(7)(A) Election Statement Example for Filing

Making a 469(c)(7)(A) election allows qualifying real estate professionals to treat rental activities as non-passive for tax purposes, potentially unlocking greater deductions. This election benefits those actively managing rental properties who want to offset losses against other income. Properly drafting the election statement is essential for IRS compliance.

To file this election, taxpayers must include specific details in their statement and follow submission procedures.

Basic Filing Requirements

Taxpayers must attach a written statement to their timely filed tax return for the year they want the election to take effect. The IRS does not provide a standardized form, so the statement must be manually drafted and include all necessary details. It should be attached to Form 1040, 1040-SR, or 1040-NR, depending on the taxpayer’s filing status. If filing as a partnership or S corporation, the election should be included with Form 1065 or 1120-S.

The statement must clearly indicate the taxpayer is making the election under Section 469(c)(7)(A) and must be signed by the taxpayer or an authorized representative. The election must be made in the first year the taxpayer seeks to treat rental activities as non-passive. If not included with the original return, it cannot be made on an amended return unless specific relief provisions apply.

If a taxpayer fails to attach the statement, relief may be available under Treasury Regulation 301.9100-2 or 301.9100-3, which allow extensions of time if the failure was due to reasonable cause. Obtaining relief requires a formal request and may involve additional filing fees.

Components of an Example Statement

A properly drafted election statement must contain specific elements to ensure IRS compliance. While there is no official template, the statement should be structured clearly and concisely.

Taxpayer Identification

The statement must include the taxpayer’s full legal name, Social Security Number (SSN) or Employer Identification Number (EIN), and mailing address. If the election is for a partnership or S corporation, the entity’s name and EIN should be used instead.

For joint filers, both spouses’ names and SSNs should be included if making the election together. The IRS uses this information to associate the election with the correct tax return, so errors in identification details could lead to processing issues.

Additionally, the tax year for which the election is being made should be clearly stated. For example:

“Taxpayer John Doe (SSN: XXX-XX-XXXX) hereby elects under Section 469(c)(7)(A) of the Internal Revenue Code for the tax year ending December 31, 2023, to treat rental real estate activities as non-passive.”

Declaration of Real Estate Activities

The statement must confirm the taxpayer qualifies as a real estate professional under Section 469(c)(7). This requires meeting both of the following conditions:

1. More than 50% of the taxpayer’s total personal services performed during the tax year must be in real property trades or businesses in which they materially participate.
2. The taxpayer must have spent at least 750 hours during the tax year materially participating in real estate activities.

The statement should affirm these requirements have been met. A sample declaration might read:

“The taxpayer materially participates in real property trades or businesses and has performed more than 750 hours of services in such activities during the tax year.”

While supporting documentation is not required to be attached, taxpayers should maintain detailed records, such as time logs, calendars, or work summaries, in case of an audit. If the taxpayer owns multiple rental properties, they should indicate whether they are electing to aggregate all rental activities as a single enterprise.

Statement of Aggregation

If the taxpayer owns multiple rental properties, they may choose to aggregate them as a single activity for material participation purposes. This allows hours worked across all properties to be combined, making it easier to meet the 750-hour threshold.

The election statement should clearly indicate whether the taxpayer is making this aggregation election. A sample wording might be:

“Pursuant to Section 469(c)(7)(A), the taxpayer elects to treat all rental real estate activities as a single activity for purposes of determining material participation.”

Once made, this election applies to all future tax years unless revoked by filing a new statement with a subsequent tax return. The IRS generally does not allow taxpayers to switch between aggregated and non-aggregated treatment without a valid reason, such as a significant change in business operations.

Taxpayers should carefully consider whether aggregation is beneficial, as it can impact how passive activity losses are calculated. If one property generates a loss while another produces income, aggregation may allow the loss to offset the income, reducing taxable earnings. However, if a taxpayer later sells one of the properties, the aggregated treatment could affect how suspended passive losses are recognized. Consulting a tax professional before making this election is advisable.

E-Filing Procedures

Submitting a Section 469(c)(7)(A) election statement electronically requires attention to IRS e-file system constraints. While tax preparation software facilitates most filings, it does not always provide a direct option to attach custom statements. Taxpayers must typically upload the statement as a PDF attachment when filing through an authorized e-file provider. The IRS recognizes this method as equivalent to attaching a paper statement to a physical return.

The process varies depending on the tax software provider. Some platforms include a designated section for attaching additional statements, while others require navigating to an “other attachments” or “supporting documents” section. If using a tax professional, taxpayers should confirm that the preparer includes the election statement before submission. The IRS does not process separate election statements sent outside of the tax return, so failure to attach it correctly could mean the election is not recognized.

After submission, taxpayers receive an acknowledgment from the IRS confirming receipt. If the return is rejected due to formatting issues or missing attachments, the taxpayer must correct the error and resubmit before the filing deadline. Since late elections are generally not permitted, verifying that the election statement was included in the accepted return is important. Keeping a copy of the e-file confirmation and attached statement provides documentation in case of future disputes.

Recordkeeping Essentials

Maintaining thorough documentation is necessary for ensuring compliance with a Section 469(c)(7)(A) election. Taxpayers should preserve a copy of the original election statement along with the complete tax return for the year in which the election was made. Since this election remains in effect indefinitely once made, taxpayers should also retain proof of their qualification as a real estate professional each year.

Detailed logs of real estate activities are particularly useful in the event of an audit. These records should include the nature of the work performed, time spent on each task, and supporting materials such as emails, invoices, or schedules. While contemporaneous logs are not explicitly required by the IRS, courts have favored taxpayers who maintain organized and consistent documentation. A common approach is using a spreadsheet or time-tracking software to log hours worked on property management, lease negotiations, and maintenance oversight.

Financial records must also be meticulously maintained, including rental income statements, expense receipts, mortgage interest records, and depreciation schedules. If the taxpayer aggregates multiple rental properties, separate books should still be kept for each property to track individual performance and ensure accurate reporting of gains, losses, and depreciation recapture if a property is sold.

Possible Rejection Factors

An election under Section 469(c)(7)(A) can be rejected if filing errors occur. One common reason is failing to attach the election statement to a timely filed return. The IRS does not allow late elections unless the taxpayer qualifies for relief under Treasury Regulation 301.9100-2 or 301.9100-3, which generally requires demonstrating reasonable cause. If the election is missing, taxpayers may need to seek a private letter ruling to request relief, which can be expensive and time-consuming.

Another frequent issue is improper formatting or incomplete information in the statement. If the taxpayer’s identifying details, tax year, or declaration of real estate professional status are unclear or missing, the IRS may not recognize the election as valid.

In some cases, the IRS may challenge the election if the taxpayer’s real estate activities do not meet the material participation requirements. If an audit reveals insufficient documentation of hours worked or a lack of active involvement in rental operations, the election could be disallowed. To minimize this risk, taxpayers should ensure their records clearly demonstrate their level of participation and, if necessary, seek professional guidance to verify compliance with IRS standards.