What Is a Grouping Election for Rental Properties?

A grouping election is a tax election that allows a qualifying Real Estate Professional to treat all of their rental real estate interests as a single rental real estate activity for purposes of the passive activity loss rules. This election, authorized by Treasury Regulation Section 1.469-9(g), is one of the most important -- and most frequently overlooked -- elections available to real estate investors.

Why the Grouping Election Matters

Under the passive activity rules of IRC Section 469, a Real Estate Professional must not only meet the 750-hour and 50% tests but must also materially participate in each rental activity for that activity's losses to be treated as non-passive. If you own five rental properties and each is treated as a separate activity, you need to materially participate in each one individually. The most common material participation test -- 500 hours in the activity -- would require 2,500 total hours across five properties.

The grouping election solves this problem by collapsing all rental real estate interests into a single activity. Once grouped, you only need to meet material participation for the combined activity. If you spend a total of 500 hours across all five properties, you satisfy the requirement. This is dramatically easier than meeting the threshold property by property.

How to Make the Election

The grouping election is made by attaching a statement to your timely filed tax return (including extensions) for the first tax year in which you qualify as a Real Estate Professional and wish to apply the election. The statement should declare that you are electing to treat all rental real estate interests as a single rental real estate activity under Treas. Reg. Section 1.469-9(g).

There is no official IRS form for this election. The statement should include your name, Social Security number, a clear declaration of the election, and the tax year it applies to. Many tax software programs include a checkbox or entry field for this election, but it is critical to verify that the election statement is actually included in the filed return. Your CPA should confirm this as part of their review.

Timing: When to Make the Election

The election must be made in the first year you qualify for REPS and want to use it. If you qualified as a Real Estate Professional in 2024 but failed to attach the grouping election statement to your 2024 return, you may lose the ability to treat your 2024 rental losses as non-passive. The IRS has taken the position in cases like Kosonen v. Commissioner that failure to make the election in the first eligible year can result in denial of the REPS benefits.

If you missed the election, there may be options. Revenue Procedure 2011-34 provides relief for certain late grouping elections if the taxpayer can demonstrate reasonable cause for the failure. Your CPA can evaluate whether late election relief is available in your situation.

The Grouping Election vs. General Activity Grouping

Do not confuse the REPS grouping election under Treas. Reg. Section 1.469-9(g) with the general activity grouping rules under Treas. Reg. Section 1.469-4. The general rules allow any taxpayer to group activities forming an "appropriate economic unit," but they cannot group rental activities with non-rental activities for most purposes. The REPS election is available only to qualifying Real Estate Professionals and applies exclusively to rental real estate interests.

Once Made, the Election Is Generally Binding

The grouping election is binding for the tax year in which it is made and all subsequent tax years, unless there is a material change in facts and circumstances. Adding or selling a property generally does not constitute a material change. The IRS expects consistency once the election is made. If you group your properties in 2024, you cannot ungroup them in 2025 simply because it would produce a better tax result.

Interaction with Property Dispositions

One potential downside of grouping is its effect on suspended passive loss release upon disposition. Under IRC Section 469(g), suspended losses are released when you dispose of your entire interest in a passive activity in a fully taxable transaction. If all your properties are grouped as a single activity, selling one property does not constitute disposing of your entire interest in the grouped activity. You must sell all grouped properties to trigger the release of suspended losses -- though this is less of a concern for REPS taxpayers who are already deducting losses currently.

The grouping election is a technical but enormously impactful decision. Every investor pursuing REPS should discuss it with their CPA before filing their return.

---

This article is for informational purposes only and does not constitute legal or tax advice. Consult a qualified tax professional regarding your specific circumstances. AE Tax Advisors, 935 Lake Elmo Dr, Suite B, Billings, MT 59105. Phone: (631) 614-5762.