If you like Carl's answer that's OK but one part of it is wrong. You can "actively participate" EVEN IF you have a property manager or use a management company because it's a REAL low standard......all you have to do is make some basic decisions AND you can tell your manager to do whatever you say and your manager must follow your instructions.
Read this https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/if-we-have-a-property...
and from pub 925.....Active participation isn’t the same as material participation (defined later). Active participation is a less stringent standard than material participation. For example, you may be treated as actively participating if you make management decisions in a significant and bona fide sense. Management decisions that count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions.
