What Is the Grouping Election?
The grouping election under Treasury Regulation 1.469-9(g) allows a qualifying Real Estate Professional to treat all interests in rental real estate as a single activity for material participation purposes. Without it, you must prove material participation in each rental property separately. With it, you prove participation once across your entire portfolio.
If you claimed REPS on your tax return and treated all your rental losses as non-passive, but you never actually attached the written election statement, you may have a problem. The IRS could argue that without the formal election, each rental must be evaluated independently for material participation, potentially turning some or all of your losses back to passive.
For the exact language required, see our grouping election statement template.
Revenue Procedure 2011-34: The Late Election Relief
The IRS recognized that many qualifying taxpayers were filing their returns as if they had made the grouping election (treating all rentals as one activity) without ever formally attaching the statement. Revenue Procedure 2011-34 provides a path to fix this retroactively.
To qualify for relief, you must meet all of the following conditions:
Condition 1: You are a qualifying taxpayer. You must have met the requirements for Real Estate Professional Status under IRC Section 469(c)(7)(B) for each year you are requesting relief. That means more than 750 hours and more than 50% of your working time in real property trades or businesses.
Condition 2: You filed consistently as if the election was in place. For every tax year in question, you must have treated all your rental real estate interests as a single activity on your tax return. If you treated some rentals as passive and others as non-passive in the same year, you were not filing consistently with the election, and the relief may not apply.
Condition 3: You failed to make a timely election. You did not attach the formal written statement to your original return (or amended return filed by the due date) for the first year you intended the election to take effect.
Condition 4: You have not previously had the election denied. If the IRS already examined your return and specifically denied the grouping election, Revenue Procedure 2011-34 generally does not provide a second chance for that year.
How to File the Late Election
If you meet all four conditions, here is how to request relief:
Step 1: Prepare the election statement. Write the same statement you would have attached to your original return. It should reference Treasury Regulation 1.469-9(g), identify yourself as a qualifying taxpayer, and list all rental real estate interests included in the election.
Step 2: Add a Revenue Procedure 2011-34 heading. At the top of your election statement, include the words "FILED PURSUANT TO REV. PROC. 2011-34" so the IRS knows this is a late election under the relief procedure.
Step 3: Attach it to your next filed return. If you have not yet filed for the current tax year, attach the late election statement to that return. The election will apply retroactively to all prior years in which you filed consistently as a qualifying taxpayer.
Step 4: Do not amend prior returns. Under Revenue Procedure 2011-34, you generally do not need to file amended returns for the prior years. The election is treated as if it was in place for all years in which you met the conditions. However, if your CPA identifies issues with prior returns that need correction, those should be addressed separately.
What the Late Election Statement Looks Like
Here is the additional language to add at the top of a standard election statement:
FILED PURSUANT TO REV. PROC. 2011-34
Election to Treat All Interests in Rental Real Estate as a Single Rental Real Estate Activity
Pursuant to Treasury Regulation Section 1.469-9(g) and Revenue Procedure 2011-34, the undersigned taxpayer hereby elects to treat all interests in rental real estate as a single rental real estate activity. This election is being filed under the relief provided by Revenue Procedure 2011-34 because the taxpayer failed to attach a timely election statement to the original return, but has filed all prior returns consistent with having made this election.
This election applies retroactively to the taxable year ending December 31, [FIRST YEAR YOU QUALIFIED AND FILED CONSISTENTLY], and all subsequent years in which the taxpayer was a qualifying taxpayer.
[Remainder of standard election statement: taxpayer name, SSN, qualifying spouse, list of properties]
When Revenue Procedure 2011-34 Does Not Help
There are situations where the late election relief will not apply:
You did not actually qualify as a Real Estate Professional. The relief is for taxpayers who did the work but forgot the paperwork. If you did not meet the 750-hour and 50% tests, no amount of paperwork can fix that.
You filed inconsistently. If you treated some rentals as passive and others as non-passive without a clear grouping election, the IRS will not retroactively apply the election to clean up an inconsistent position.
You are currently under audit and the grouping election is at issue. While Revenue Procedure 2011-34 does not explicitly prohibit relief during an audit, the practical reality is that an auditor may not accept a retroactive election when the election is the specific item being challenged. Consult a tax attorney if this is your situation.
You need to make the election for the first time going forward. If you have never filed as if the election was in place (because you just learned about it), you do not need Revenue Procedure 2011-34. Simply attach the election statement to your next tax return and it takes effect for that year forward.
The Bottom Line
Revenue Procedure 2011-34 exists because the IRS recognizes that the grouping election is an administrative formality that many qualifying taxpayers overlook. If you have been doing the right thing on your returns but missing the paperwork, the fix is straightforward.
If you are not sure whether you have been filing consistently or whether you qualify, this is a conversation to have with a CPA who specializes in real estate tax. The stakes are high enough that guessing is not an option.
And going forward, make sure your REPS hours are documented properly from the start. REPS Time keeps your hours organized by property and activity type so that your REPS qualification and grouping election are backed by solid records, not reconstructed estimates.
