Passive Activity Rules
Understanding Passive Activities
Passive activity rules limit the use of losses from activities in which the taxpayer does not materially participate. These rules were designed to prevent taxpayers from using passive losses to offset unrelated active income.
- Passive activities generally involve no material participation.
- Rental activities are generally treated as passive.
- Passive losses generally offset passive income only.
- Unused passive losses may carry forward.
Note
Material participation is one of the most frequently tested concepts within passive activity taxation.
Summary
Passive activity rules restrict the immediate use of certain losses while allowing future utilization under appropriate circumstances.