Gragg v. United States, No. 14-16053 (9th Cir. 2016)Annotate this Case
I.R.C. 469 restricts taxpayers’ ability to reduce their taxable income using passive rental losses. At issue is whether section 469 entitles real estate professionals like petitioner to deduct rental losses without showing material participation in the rental property. The court held that section 469’s text, regulations, and relevant case law all point in one direction: though taxpayers who qualify as real estate professionals are not subject to section 469(c)(2)’s per se rule that rental losses are passive, they still must show material participation in rental activities before deducting rental losses. Congress endeavored to narrow the scope of permissible deductions for passive losses in real estate investments, in part by requiring material participation before losses may be deducted. The court concluded that real estate professionals were not exempted from this requirement. Accordingly, the court affirmed the grant of summary judgment for the government.