Definition
A tax election allowing an investor to treat multiple rental properties as a single group for passive activity loss purposes, treating all as one activity rather than separate activities.
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Normally, each rental property is treated as a separate passive activity. Grouping election allows treating multiple properties as a single group, potentially allowing overall losses (if some properties profit and others lose). If you own five rental houses, four profitable and one with $30,000 loss, grouping them means the overall group is profitable and losses are offset. Without grouping, the loss property's loss might be suspended (subject to passive activity limits). Grouping is beneficial when some properties are profitable and others have losses—it allows losses to offset income from other properties. Grouping must be elected on a timely tax return and is binding for all future years unless the IRS approves changing it. Grouping is part of tax planning strategy and should be discussed with a CPA familiar with real estate. Grouping can significantly impact tax liability in real estate portfolios with mixed performance.
Pro Tip
Consider grouping election if you own multiple rental properties with mixed results. Grouping can unlock loss deductions that would otherwise be suspended.
Example
An investor owns two rental properties: one profitable ($10,000 income) and one with $15,000 loss. With grouping election, they report the group as $5,000 profit and can deduct the loss against it. Without grouping, loss might be suspended.