Can you group activities for the passive loss rules?

Why grouping matters

Publication 925 gives three reasons grouping is worth the paperwork. If you combine two activities, you need to show material participation only in the combined activity, rather than in each one separately. If you dispose of one of the two, you have disposed of only part of your interest in the single activity, whereas if they were separate you would have disposed of your entire interest in that activity, which is the event that releases suspended passive losses. And grouping affects the 10% ownership threshold for active participation in rental real estate. So the choice can help or hurt, and it is not easily reversed.

The appropriate economic unit test

The general standard is that activities may be grouped if they form an appropriate economic unit for measuring gain or loss. All relevant facts and circumstances count, and you may use any reasonable method of applying them. The publication names five factors that carry the most weight, none of which must be present for every grouping:

• the similarities and differences in the types of trades or businesses;
• the extent of common control;
• the extent of common ownership;
• the geographical location;
• the interdependencies between the activities, including whether they buy or sell goods between themselves, provide products or services that are generally provided together, have the same customers, have the same employees, or use a single set of books and records.

The publication's bakery example shows why there is rarely a single right answer. A person with a bakery and a movie theater in Baltimore and the same two businesses in Philadelphia may be able to group them as one activity, as a theater activity and a bakery activity, as a Baltimore activity and a Philadelphia activity, or as four separate activities. Another example treats a wholesale business and a trucking business under common control as one activity because the trucking firm mostly hauls for the wholesaler.

Rental activities are fenced off

A rental activity generally cannot be grouped with a trade or business activity. The publication allows it only if the two form an appropriate economic unit and one of three conditions holds: the rental is insubstantial in relation to the business, the business is insubstantial in relation to the rental, or each owner of the business has the same ownership interest in the rental, in which case the part of the rental involving property used in the business can be grouped with it. The illustration involves a married couple filing jointly where one spouse owns a grocery store S corporation and the other owns the building S corporation that leases to it. Because jointly filing spouses are treated as one taxpayer for these rules, the same owner holds 100% of each, and the rental and the store can be grouped if they are an appropriate economic unit. Likewise, real property rentals and personal property rentals can be combined only if you provide the personal property in connection with the real property or the reverse.

Activities that may not be grouped

If you own an interest as a limited partner or a limited entrepreneur in a film or video tape activity, farming, leasing section 1245 property, oil and gas exploration or exploitation, or geothermal exploration or exploitation, you may not group it with an activity in another type of business. Grouping within the same type of business is allowed, again subject to the economic unit test. A limited entrepreneur is someone with an interest in an enterprise other than as a limited partner who does not actively participate in its management.

A trading activity in personal property that is actively traded, such as financial securities, cannot be grouped with any other activity, including other trading activities, if you do not materially participate in it. The prohibition applies to tax years beginning on or after March 22, 2021, which means calendar 2022 for a calendar-year taxpayer. Activities conducted through a publicly traded partnership may not be grouped with any other activity, and each PTP is tested on its own.

Entities group first

A partnership, S corporation, personal service corporation or closely held corporation must group its own activities using these rules. Once the entity has grouped, you as owner may group those activities with each other, with activities you conduct directly, or with activities held through other entities, but you may not split what the entity combined. Activities conducted through a personal service or closely held corporation can be grouped with your other activities only to decide whether you materially or significantly participated in those other activities.

Consistency, IRS regrouping and disclosure

Once you group, you generally may not regroup in a later year. You must regroup only if the original grouping was clearly inappropriate or a material change in facts made it so. If a primary purpose of your grouping is to avoid the passive activity rules and the result is not an appropriate economic unit, the IRS can regroup for you.

For tax years beginning after January 24, 2010, you file a written statement with your original return for the first year you group two or more activities, for the year you add a new activity to an existing group, and for the year you regroup (with an explanation of the material change). The statement gives names, addresses and employer identification numbers where applicable and declares that the grouped activities make up an appropriate economic unit. If you fail to disclose, each trade or business or rental is treated as a separate activity, though a late disclosure can still be timely if all affected returns were filed consistently with the claimed grouping and you disclose on the return for the year you discovered the omission. Partnerships and S corporations disclose on Form 1065 or Form 1120-S, and owners need a separate statement only if they combine activities the entity did not.

The Net Investment Income Tax fresh start

If you become subject to the Net Investment Income Tax for the first time, you may regroup once. On an original return the conditions are that you were not previously subject to the tax, that the amount you would have entered on Form 8960 line 12 without regrouping is more than zero, and that line 13 is greater than line 14. The regrouping applies to that year and all future years, and you attach the regrouping statement. An amended return can regroup in narrower circumstances, requiring that the amendment itself makes you subject to the tax for the first time and that the assessment period under section 6501 has not ended.

Sources

• IRS Publication 925, Passive Activity and At-Risk Rules (2025): Grouping Your Activities (Appropriate Economic Units, Consistency and disclosure requirement, Regrouping by the IRS, Rental activities, Certain activities may not be grouped, Activities conducted through another entity); Regrouping Due to Net Investment Income Tax; Disclosure Requirement; Reminders (Grouping rules). Read November 2, 2026.

Edition read: Publication 925 (2025), for use in preparing 2025 returns. Dollar limits and dates in this publication are for 2025; check the current publication and form instructions for your tax year. This page summarizes the publication and does not replace it.