Revoking a 469(7)(c) election

 The activities no longer make up an appropriate economic unit for measurement of gain or loss, such that grouping is clearly inappropriate.  (Basically, if you wanted to make the election now, you wouldn't be able to.)

IRS Examination Guidelines 750 Hour Rule

ISSUE: REAL ESTATE PROFESSIONALS 750 Hours
If a partner spends the majority of his/her time on real property businesses or rentals and more than 750 hours during the year, his/her rental real estate activities are no longer automatically passive. Instead, they are treated like a business. If the taxpayer materially participated in the rental activity, losses are no longer subject to the passive loss rules. Some taxpayers incorrectly assume if they work in a real property business, rental losses are no longer subject to the passive loss limitations.
Treas. Reg. section 1.469-9(e)(1) holds that a real estate professional’s rental remains passive unless the taxpayer materially participated.
In the absence of a written election to group all rentals as a single activity, each rental real estate property is a separate activity, in which the partner must prove that he/she materially participated. If the partner owns 50 percent or more of the partnership, each rental conducted by the partnership is deemed a separate activity. Thus, the partner must rise to material participation (work more than 500 hours during the year, perform most of the work or meet one of the other tests in Treas. Reg. section 1.469-5T(a)) for each separate rental activity.
A written election can be made to group rentals as a single activity, making it easier to rise to the 500 hour test for material participation. See Treas. Reg. section 1.469-9(g). The election can be made with any original return and binds all future years. It is not retroactive. As a practical matter, not many elections have been filed.
Examination Techniques
On review of the partnership return –
• Ask who manages or oversees each rental activity.
• Ask if any partner(s) has specific duties in relation to any rental activity.
• Check K-1s for guaranteed payments. Ask what the guaranteed payments were for.
On review of the partner’s Form 1040 –
• Check Schedule E line 43 to see if there is an entry indicting that the taxpayer claimed to be a real estate professional.
• Check the occupation beside each spouse’s name. Does one or the other appear to be a real estate professional business?
• Note whether the taxpayer and the spouse have full-time jobs and other nonpassive activities.
• Note where the Schedule E rentals are located in proximity to the taxpayer’s residence. Ask who performs most of the work on the rentals, husband or wife. Inquire what partner services the Taxpayer performs with his/her rentals.
Because partnerships are not required to take passive losses or credits into account for their taxable year, the passive loss limitation generally is not a partnership item for TEFRA entities. If an individual partner’s return is open and the issue is solely meeting the hourly tests for material participation in Treas. Reg. section 1.469-5T(a), there is no need to open the Form 1065. The resolution of the issue of whether a partner is subject to the passive loss limitation is not a partnership item. Whether the passive loss limitations apply to a partner has no effect on any item on the partnership's books and records. Material participation is based solely on hours worked by the individual investor.
For an open TEFRA partnership, the issue of material participation by partners should be treated as an affected item.
If there is an issue as to the characterization of loss or income, i.e. whether the partnership is conducting a trade or business, or whether it is engaged in a rental activity, or whether income should be characterized as portfolio income, the partnership entity must be opened. That is an entity level determination.
Issue Identification
Scrutinize each rental property on Form 8825 and on Schedule E. The following are indictors that the partner does not materially participate:
• Commissions;
• Management fees;
• Large labor or wages;
• Rental property is located a long distance from the partner’s residence;
• The taxpayer is a limited partner;
• The taxpayer has a low ownership interest in the partnership.
Documents to Request
1. Partner’s Form 1040.
2. Copy of the return with an election the partner may have made to group rentals as a single activity under IRC section 469(c)(7)(A) and Treas. Reg. section 1.469-9(g) and the return with which it was made.While many taxpayers have not grouped, those that did, often made the election with their 1995 Form 1040.
3. If the partnership grouped its rentals under the provisions of Treas. Reg. section 1.469-4(d)(5), a copy of the tax workpapers or any other documentation indicating rentals were grouped.
4. If the taxpayer is a real estate professional and treated rental real estate losses as nonpassive, services performed on each rental activity and hours attributable to those services.
Interview Questions
1. Who monitors the rental? Who collects the rent? Who does the repairs?
2. Does the partnership pay anyone to manage or oversee the rental, handle rental income, deal with problems, etc.?
3. Do you have a real estate agent or manager? Ask for each rental property. Check Form 8825 properties for commissions, management fees or other supervisory expense. Also check for large labor expense; possibly a hired contractor spent more time than the taxpayer. If there is paid management, it is a strong indicator taxpayer did not materially participate.
4. Does a relative or friend manage/monitor the property for free?
5. Does a tenant receive free/reduced rent for managing the rentals, or for caring for the properties? This is common practice with large apartment buildings.
Supporting Law
IRC section 469(c)(7) -- Real estate losses are nonpassive if the taxpayer spends more than half his/ her services and more than 750 hours on real property businesses and materially participates in his/her rentals.
IRC section 469(c)(7)(A)(ii) and Treas. Reg. section 1.469-9(e)(3) -- Each rental is a separate activity unless taxpayer elected to group under Treas. Reg. section 1.469-9(g) (not seen often). Thus, even if taxpayer is a real estate professional, he/she still must meet material participation (Treas. Reg. section 1.469-5T(a)) for each separate rental before losses will be fully deductible.
Treas. Reg. section 1.469-9(e) – Even if the taxpayer is a real estate professional, he/she must still materially participate in each separate rental before losses are nonpassive. If the taxpayer does not materially participate, losses remain passive.
Treas. Reg. section 1.469-9(g) -- The taxpayer must file a written election with an original return to group all rentals as a single activity.
Treas. Reg. section 1.469-9(h)(2) -- Each rental in a partnership is a single interest in rental real estate if taxpayer owns 50 percent or more of the entity. The taxpayer may elect to treat all rental real estate interests as a single activity.
Treas. Reg. section 1.469-5T(a) -- Tests to be applied to determine whether the taxpayer materially participates, that is, whether losses are deductible.

mrShay, please read this thread:

http://community.intuit.com/post/detail/bJkAvISFir3QjyacfA8pyY

It's another discussion I found by searching above in the box for "revocation of real estate election." Your question was listed first.

One elects to combine in order to be a REP, which requires material participation, not active. The total hours in a calendar year in order to be a REP must exceed 750 in total, not per property.