Commercial rental business” is the business or renting, leasing or making available for renting or leasing one or more commercial rental units. (Ord. 1596 § 4 (part), 1983)
***Conventional larger or small Landlord do not fit into this category.***Reasons as following: Tax code and the test the business activity.Definition of businessWright v. Commissioner, 31 T.C. 1264 (1959), affd. 274 F.2d 883 (6th Cir. 1960).The Tax Court noted thatbusinesses had been defined as "that which occupies the time, attention, and labor of men for the purpose of livelihood or profit," and said, "Some continuous or repeated activity in the literary field, coupled with a reasonable expectation of making a profit, would be more convincing of an intent to engage in writing as a business or profession, than does the isolated effort made by these taxpayers, even though it may have been with the hope of making a profit.
2/Rental income Rental Income as Passive IncomeTodayhttp://law.justia.com/cfr/title26/26-6.0.1.1.1.0.6.130.htmlclassCurrent reg. section 1.1362-2(c)(5)(ii)(B)(2) had not yet beenadopted when LTR 9234012 was issued. That regulation has changed theemphasis and broadened the types of rental income that will not beconsidered passive. Reg. section 1.1362-2(c)(5)(ii)(B)(2) now providesthat:“rents” does not include rents derived in the active trade orbusiness of renting property. Rents received by a corporation arederived in an active trade or business of renting property onlyif, based on all the facts and circumstances, the corporationprovides significant services or incurs substantial costs in therental business. Generally, significant services are not renderedand substantial costs are not incurred in connection with netleases. Whether significant services are performed or substantialcosts are incurred in the rental business is determined based uponall the facts and circumstances including, but not limited to, thenumber of persons employed to provide the services and the typesand amounts of costs and expenses incurred (other thandepreciation).
Passive income Passive incomeis an income received on a regular basis, with little effort required to maintain it.The AmericanInternal Revenue Servicecategorizes income into three broad types, active (earned) income, passive income, and portfolio income. It defines passive income as only coming from two sources: rental activity or "trade or business activities in which you do not materially participate."[1][2]Other financial and government institutions also recognize it as an income obtained as a result of capital growth or in relation tonegative gearing. Passive income is usuallytaxable.
Some examples of passive income are:Earnings from a business that does not require direct involvement from the owner or merchantRentfrompropertyRoyaltiesfrom publishing a book or from licensing apatentor other form of intellectual property, such as computer software productEarnings from internet advertisements on websites[3]Dividendandinterestincome from owning securities, such asstocksandbonds, is usually referred to asportfolioincome, which may or may not be considered a form of passive income. In the United States, portfolio income is considered a different type of income than passive income
The IRS has a specific definition of passive income that excludes some of the incomes listed above. Royalties, for example, are, according to the Service guide, generally non-passive in nature. Additionally, interest, dividends, annuities, and gains from stocks and bonds, lottery winnings, salaries, wages, commissions, retirement income, guaranteed payments for services are considered by the IRS to be non-passive.[5][6]Rentals generally are passive activities and are subject to the passive loss disallowance rules. See IRC § 469(c)(2). A loss from a passive activity is not currently deductible unless one of the following applies:Passive income exists (losses are allowed to the extent of passive income)The taxpayer actively participates in a rental real estate activity and qualifies for the $25,000 special allowanceThere is a qualifying disposition under IRC § 469(g) or,The taxpayer meets the requirements of IRC § 469(c)(7) for real estate professionals.More than 750 hours of service during the year.
Examination Techniques: Determine whether the taxpayer materially participates in one or more of the specific real estate trades or businesses listed above. Determine who is the real estate professional, husband or wife.Request and closely examine the taxpayer’s documentation regarding time. The taxpayer is required under Reg. § 1.469-5T(f)(4) to provide proof of services performedandthe hours attributable to those services. See Chapter 4 for more on methods of proof.Scrutinize other activities the taxpayer is engaged in to determine whether time claimed makes sense.Qualification as a real estate professional is a determination, not an election. A taxpayer may attempt to manipulate the passive activity rules by inappropriately claiming to be a real estate professional, or conversely, by not claiming to be one (for instance, if certain activities are generating net income).
Material Participation for Real Estate ProsA real estate professional may deduct rental real estate losses only to the extent he or she materially participates in each rental activity. Unless the taxpayer elected to group his rentals as a single activity, each rental is treated as a separate activity. Under the material participation rules, the time of both spouses is counted.[8]The material participation test[9]then applies separately to each individual rental real estate activity. If the taxpayer materially participates in an activity, net income or loss from that activity is non-passive. If the taxpayer does not materially participate, despite being a real estate professional, the rental is passive and losses (or income) go on Form 8582.A taxpayer, who does most of the work in a rental, meets Test 2 for material participation in Reg. § 1.469-5T(a)(2). However, if there is on-site management, it may be difficult for the taxpayer to materially participate because:Rental activities, by nature, normally do not require significant day-to-day involvement, i.e. they are not time intensive.For many taxpayers using any kind of outside management, the only material participation test available is the 500 hour test. In many situations, the other tests will not apply.In many circumstances, an individual rental activity will not require 500 hours of participation, nor will the taxpayer have sufficient time available to spend 500 hours on each individual rental real estate activity.
Conclusion:MostLandlorddo not meet the 500 hours pro test for business and do not have any trade activity character of business. Rental income is passive income, not business income.Therefore MPMC 5.12.043 Commercial Rental Business should not apply to All Landlords in the City
