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 ?
To calculate a member's self-charged interest income that is recharacterized as passive income, the member's interest income from a loan to the LLC is multiplied by his or her passed-through share of the LLC's passive interest expense deductions from all member loans (including loans by other members) and divided by the greater of (1) that member's passed-through share of interest expense deductions from all member loans used for passive activities or otherwise, or (2) that member's interest income from all loans to the LLC.
469(d)(1) defines the term "passive activity loss" as the amount by which the aggregate losses from all passive activities exceed the aggregate income from all passive activities for the year.
Rentals are generally passive activities, meaning that they are not treated as a trade or business and are not subject to self-employment taxes.
* Passive activities include trade or business ventures in which you do not materially participate; that is, you are not involved in the operation of the activity on a regular, continuous and substantial basis.
Typically, losses from a taxpayer's passive activities can be deducted only to offset income from other passive activities.
The definition of passive activity provided by IRC section 1411(c)(2) makes reference to IRC section 469 for further guidance, which defines passive activities as any activity involving the conduct of a trade or business in which the taxpayer does not materially participate.
Under the passive loss rule, aggregate losses from "passive" activities (see Q 7914) may generally be deducted in a year only to the extent they do not exceed aggregate income from passive activities in that year; credits from passive activities may be taken against tax liability allocated only to passive activities.
The passive activities and at-risk rules provide hurdles that taxpayers must overcome in order for certain losses to offset other sources of income in a given year.
* Nature--Does the design incorporate nature, light, gardens, and exterior spaces for both active and passive activities;
Passive Activities: The Technical Explanation, Page 44, further states that the new law "clarifies that the election to mark to market an interest in a passive activity does not result in the deduction of suspended losses by reason of section 469(g)(1)(A)." Also see IRS Notice 2002-29, IRB 2002-17, April 29, 2002, to this effect.
Passive activities included watching television, talking on the phone, and going to church.
Section 469(c)(2) also classifies all rental activities as passive activities, regardless of whether the taxpayer materially participates in the activity.