passive activity

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Passive Activity

An investment in which an individual does not directly participate. The most common types of passive activities are rents from a property one owns and income from a limited partnership. In both those situations, the investor puts in money but has no management authority. Some analysts consider income from dividends and coupons to be passive income, while others do not. Income from a passive activity is taxable, but it is often treated differently than active income.

passive activity

1. An activity involving a trade or business in which the taxpayer does not materially participate.
2. Any engagement in real estate rental activity.

passive activity

An IRS phrase meaning two different things: (1) A trade or business activity in which the taxpayer does not materially participate during the year. (2) A rental activity, even if the taxpayer does materially participate in it,unless the taxpayer is a real estate professional.One wants to avoid something being characterized as a passive activity,because that limits the deductions that can be taken on tax returns.

There are many ways to satisfy the material participation test and avoid characterization as a passive activity. The most common one is by working in the business for more than 500 hours a year. To be a real estate professional, you must work more than 750 hours a year in the real estate trades or businesses, and that must be more than one-half of the personal services you provide for the year for all trades or businesses.

References in periodicals archive ?
Allocation of gain or loss on dispositions of passive activities (or property used in passive activities) among various activities.
469-5T material participation tests are applied only to the taxpayer's nonrental activities to determine if they are passive activities, and all rental activities are treated as passive activities, regardless of the taxpayer's level of participation.
He writes in the article, "The real estate industry was dealt a severe blow in 1986, when Congress enacted the passive activity rules, which provided that losses from a passive activity could only be deducted to the extent of the taxpayer's net income from other passive activities.
Passive activities included watching television, talking on the phone, and going to church.
469(a) generally disallows for the tax year any passive activity loss, defined as the excess of the aggregate losses from all passive activities for the tax year over the aggregate income from all passive activities for that year.
Individuals who participate in passive activities may be limited in the amount of losses and credits that they may claim on their income tax returns.
These rules limit the deductibility of losses from passive activities (such as the rental of real estate(5)) to the extent of income the taxpayer has from passive activities.
It increases potential financial downs*des to pursuing passive activities or activities that the IRS may deem passive under Sec.
469-9 provide an exception under which the rental activities of a taxpayer who is considered a real estate professional are not treated as per se passive activities.
Free Up Suspended Passive Activity Losses By Disposing Of Activity: Losses generated by passive activities may only be used to offset income from passive activities.
Section 469(c)(2) also classifies all rental activities as passive activities, regardless of whether the taxpayer materially participates in the activity.
On his tax returns he reported each of the individual leases as separate passive activities.