passive activity

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 ?
The Tax Court recently held that a mortgage broker was not a real estate professional and therefore was subject to the passive activity loss rules of Sec.
Tax credits attributable to passive activities may be suspended under the passive activity credit rules.
Before you make any decisions, though, you should be aware of the tax implications, especially the passive activity loss rules.
com)-- Finally a solution to investors that have been carrying suspended Passive Activity Losses (PALs) on their tax return (Form 8582) every year.
8 percent tax if that income is deemed to constitute income from a passive activity of that individual.
Net investment income (NII) is broadly defined to include the sum of 1) investment-related gross income, such as interest, dividends, rent, royalties, and annuities, other than such amounts derived in the ordinary course of a trade or business (but excluding amounts derived from a financial instruments or commodities trading business (trading business) or a business that is a "passive activity" with respect to the taxpayer (passive activity business)); 2) other gross income derived from a trading business or a passive activity business; and 3) net gain attributable to the disposition of property other than property held in a trade or business other than a trading business or passive activity business.
Definition of Passive Activity and Passive Activity Losses
Generally, the passive activity provisions only have relevance when the taxpayer has a loss from one or more passive activities.
A closely held C corporation (other than a personal service corporation) can deduct its passive activity losses against its net active income (other than its investment, or "portfolio," income) and its passive credits can be applied against its tax liability attributable to its net active income.
If a taxpayer's loss passes the basis and at-risk limitation tests, the passive activity rules are applied.
Passive activity loss rules regarding rental real estate;
Unlike hearing, which is a physiological passive activity, listening is an active cognitive process.