Page:United States Statutes at Large Volume 100 Part 3.djvu/429

 PUBLIC LAW 9 9 - 5 1 4 - O C T. 22, 1986

100 STAT. 2237

"(B) any losses to the extent of the excess described in subparagraph (A) shall not be allowed as a deduction for any taxable year. "(3) INSTALLMENT SALE OF ENTIRE INTEREST.—In the case of an installment sale of an entire interest in an activity to which section 453 applies, paragraph (1) shall apply to the portion of such losses for each taxable year which bears the same ratio to all such losses as the gain recognized on such sale during such taxable year bears to the gross profit from such sale realized (or to be realized) when payment is completed. "(h) MATERIAL PARTICIPATION DEFINED.—For purposes of this section— "(1) IN GENERAL.—A taxpayer shall be treated as materially participating in an activity only if the taxpayer is involved in the operations of the activity on a basis which is— "(A) regular, "(B) continuous, and "(C) substantial. "(2) INTERESTS IN LIMITED PARTNERSHIPS.—Except as provided in regulations, no interest in a limited partnership as a limited partner shall be treated as an interest with respect to which a taxpayer materially participates. "(3) TREATMENT OF CERTAIN RETIRED INDIVIDUALS AND SURVIV-

ING SPOUSES.—A taxpayer shall be treated as materially participating in any farming activity for a taxable year if paragraph (4) or (5) of section 2032A(b) would cause the requirements of section 2032A(b)(l)(C)(ii) to be met with respect to real property used in such activity if such taxpayer had died during the taxable year. "(4) CERTAIN CLOSELY HELD CORPORATIONS AND PERSONAL SERVICE CORPORATIONS.—A closely held C corporation or per-

sonal service corporation shall be treated as materially participating in an activity if— "(A) 1 or more shareholders holding stock representing more than 50 percent (by value) of the outstanding stock of such corporation materially participate in such activity, or "(B) in the case of a closely held C corporation (other than a personal service corporation), the requirements of section 465(c)(7)(C) (without regard to clause (iv)) are met with respect to such activity. "(5) PARTICIPATION BY SPOUSE.—In determining whether a taxpayer materially participates, the participation of the spouse of the taxpayer shall be taken into account, "(i) $25,000 OFFSET FOR RENTAL REAL ESTATE ACTIVITIES.—

"(1) IN GENERAL.—In the case of any natural person, subsection (a) shall not apply to that portion of the passive activity loss or the deduction equivalent (within the meaning of subsection (j)(5)) of the passive activity credit for any taxable year which is attributable to all rental real estate activities with respect to which such individual actively participated in the taxable year in which such portion of such loss or credit arose. "(2) DOLLAR LIMITATION.—The aggregate amount to which paragraph (1) applies for any taxable year shall not exceed $25,000. "(3) PHASE-OUT OF EXEMPTION.—

"(A) IN GENERAL.—In the case of any taxpayer, the $25,000 amount under paragraph (2) shall be reduced (but

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