You Make the Call - May 7, 2026

Question: A taxpayer qualifies as a real estate professional under §469(c)(7) and made the election under Reg. §1.469-9(g) to treat all rental real estate interests as a single activity. During the current year, the taxpayer sells one of several rental properties at a gain in a fully taxable transaction to an unrelated party. The taxpayer has suspended passive activity losses (PALs) from prior years related to the rental portfolio. Do the suspended PALs become fully deductible in the year of sale? 

Answer: No. Because the taxpayer elected under Reg. §1.469-9(g) to treat all rental real estate interests as a single activity, the sale of one property is treated as a partial disposition of that activity, not a disposition of the entire activity. 

Under §469(g)(1), suspended passive activity losses are released only upon a fully taxable disposition of the taxpayer’s entire interest in the activity to an unrelated party. Although the sale is fully taxable, the taxpayer has not disposed of the entire aggregated rental activity – only one component of it. 

As a result, the suspended PALs remain suspended and are not deductible in the year of sale. 

This outcome illustrates a key trade-off of the §1.469-9(g) aggregation election: while it may facilitate meeting the material participation tests by combining time and involvement across all elected rental properties into one activity, it can delay the release of suspended losses when individual properties are sold.