The real estate industry seems satisfied with regulations proposed by the Internal Revenue Service that make it easier to create passive income against which passive losses can be taken.

But the industry believes the move doesn't remove the need for legislation, specifically the provision contained in the Revenue Act of 1992 (H.R. 11), which the House passed July 2.

That measure would permit deductions of real estate losses against real estate income if the investor "materially participates" in the management of the business.

"The old regulations made it very difficult to create passive income against which passive losses could be taken," said Linda Goold, tax counsel for the National Association of Realtors. "Unfortunately, they don't provide any general rules but require a determination to be made on a facts and circumstances basis."

"The new regulations probably won't increase real estate investment," said David H. Evaul, chairman of the American Bankers Association's Task Force on Passive Losses. "This is a matter of fairness. If the legislation is passed, it could bring in new investors."

Evaul, who heads the real estate and tax practice of Jones, Day, Reavis & Pogue in Dallas, said that the proposed regulations will replace more than 200 pages of rules.

The problem exists because the Tax Reform Act of 1986 essentially barred deductions for losses from real estate even if the taxpayer was actively involved in the business.

The new regulations permit taxpayers to arrange their business activities in a way that could produce activities that would be considered passive, and thus the passive losses could be deducted from the income from such entities.

"This is the way the regulations should have been issued in the first place," said Anthony S. Freedman, partner in the Washington office of the Atlanta-based law firm of Powell, Goldstein, Frazer & Murphy.

While Goold acknowledged it is more likely that the new regulations would be most useful to a large operation, she said it is not a question of favoring large enterprises over smaller ones.

"The entire industry is in favor of the regulations," she said. A public hearing on the proposed regulations is set for July 24.

The Revenue Act of 1992 would greatly diminish the impact of the new regulations because it specifically permits a deduction of real estate losses from real estate income if the taxpayer materially participates in real estate operations. It defines real estate operations to include development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, brokerage trade or business.

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