Passive Activity

AAA

DEFINITION of 'Passive Activity'

Activity in which the taxpayer did not materially participate in during the tax year. Internal Revenue Service (IRS) defines two types of passive activity: trade or business activities not materially participated in, and rental activities even if the taxpayer materially participated in them (unless the taxpayer is a real estate professional). Material participation is defined by the IRS as involvement in the activity of the business on a regular, continuous and substantial basis.

The passive activity rules apply to individuals, estates, trusts (except grantor trusts), closely held corporations, and personal service corporations.

INVESTOPEDIA EXPLAINS 'Passive Activity'

Income from rental properties is a suitable example of a passive activity. Making a distinction between passive and active income is important because the taxpayer can claim a passive loss only against income generated from passive activities. A passive loss cannot be claimed against active income. Any excess passive activity loss can be carried forward to future years until used, or until it can be deducted in the year when the taxpayer disposes of the passive activity in a taxable transaction.

RELATED TERMS
  1. Income

    Money that an individual or business receives in exchange for ...
  2. Active Income

    Income for which services have been performed. This includes ...
  3. Passive Income

    Earnings an individual derives from a rental property, limited ...
  4. Portfolio Income

    Income from investments, dividends, interest, royalties and capital ...
  5. Passive Activity Loss Rules

    A set of rules that prohibits using passive losses to offset ...
  6. Holding Period Return/Yield

    The total return received from holding an asset or portfolio ...
Related Articles
  1. Tax Tips For The Individual Investor
    Retirement

    Tax Tips For The Individual Investor

  2. Surviving The IRS Audit
    Taxes

    Surviving The IRS Audit

  3. Choosing The Best Disability Insurance ...
    Options & Futures

    Choosing The Best Disability Insurance ...

  4. Capital Gains Tax 101
    Taxes

    Capital Gains Tax 101

comments powered by Disqus
Hot Definitions
  1. Harvest Strategy

    A strategy in which investment in a particular line of business is reduced or eliminated because the revenue brought in by ...
  2. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  3. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The ...
  4. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The ...
  5. Budget Deficit

    A status of financial health in which expenditures exceed revenue. The term "budget deficit" is most commonly used to refer ...
  6. Floating Exchange Rate

    A country's exchange rate regime where its currency is set by the foreign-exchange market through supply and demand for that ...
Trading Center