Business & farm

Rental Activities are passive by nature.

There are three levels of Participation.   For Active Participants, real estate activities are still passive activities.  For  Material Participants and Real Estate Professionals, Real estate is not a passive activity.

Active Participation

Taxpayers are considered to have actively participated in a rental real estate activity if the taxpayer owned at least 10% of the rental property and you made management decisions. Management decisions generally include approving new tenants, deciding on rental terms, approving expenditures etc. .

Material Participation

A business activity is not passive if you materially participated in the activity. Material Participation means that the taxpayer is involved in the activity on a basis that is "regular, continuous, and substantial". The IRS has a series of test to indicate if you materially participated or not:

1. The individual worked in the activity for more than 500 or more hours during the year,
2. The individual's participation in the activity constitutes substantially all of the participation in the activity of all individuals for the tax year, including the participation of individuals who did not own interest in the activity,
3. The individual participated in the activity for more than 100 hours during the tax year, and the individual's participation was at least as much as any other individual for the year,
4. The activity is a 'significant participation activity' for the year (more than 100 hours of participation per activity with an aggregate of 500 hours),
5. The individual materially participated in the activity for any five (whether or not consecutive) of the ten immediately preceding tax years,
6. The activity is a personal service activity and the individual materially participated in the activity for any three preceding tax years, or
7. Based on all the facts and circumstances, the individual participated in the activity on a regular, continuous, and substantial basis during the year. This test is not met if the individual participated in the activity for 100 hours or less during the year. Managing the activity does not count for this purpose if any person other than the individual received compensation for managing the activity, or an individual spent more hours during the year managing the activity.

Real Estate Professional

Activities of real estate professionals are not treated as passive activities. The taxpayer qualifies as a real estate professional if both of the following conditions are met:

1. More than half of the personal services the taxpayer performed in all trades or businesses during the year were performed in real property trades or businesses in which the taxpayer materially participated, and

1. The taxpayer performed more than 750 hours of services during the tax year in real property trades or businesses in which the taxpayer materially participated.