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. Passive Income

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

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

    A set of rules that prohibits using passive losses to offset ...
  5. Active Income

    Income for which services have been performed. This includes ...
  6. Holding Period Return/Yield

    The total return received from holding an asset or portfolio ...
Related Articles
  1. Retirement

    Tax Tips For The Individual Investor

    We give you seven guidelines to help you keep more of your money in your pocket.
  2. Taxes

    Surviving The IRS Audit

    Keeping thorough records and knowing the penalties make this experience easier than you'd expect.
  3. Options & Futures

    Choosing The Best Disability Insurance

    Social Security benefits can be hard to collect. Find out why you need disability insurance to protect your income, and learn how to choose the right policy for you.
  4. Taxes

    Capital Gains Tax 101

    Find out how taxes are applied to your investment returns and how you can reduce your tax burden.
  5. Taxes

    Avoiding IRS Penalties On Your IRA Assets

    The best way to avoid additional charges and taxes is to know which transactions have expensive consequences.
  6. Taxes

    IRS To Regulate Tax Preparers

    But new standards won't help taxpayers this filing season.
  7. Retirement

    Why It Pays To Be A Lazy Investor

    Be a couch potato! This passive, but diversified, investing strategy could be for you.
  8. Investing Basics

    What is the difference between an IPO and a seasoned issue?

    Learn how companies issue IPO securities when they first go public and seasoned issue shares if they sell more shares in the secondary market.
  9. Trading Strategies

    Is volatility a good thing or a bad thing from the investor's point of view, and why?

    Learn the basics of volatility in the stock market and how the increased risk provides greater opportunities for profit for both long- and short-term traders.
  10. Trading Strategies

    Swing Trading Indicators: For Those Too Impatient For Buy And Hold

    For investors who are too impatient for the buy and hold strategy, swing trading may be your thing--but seriously, be careful.

You May Also Like

Hot Definitions
  1. Multiplier Effect

    The expansion of a country's money supply that results from banks being able to lend. The size of the multiplier effect depends ...
  2. Command Economy

    A system where the government, rather than the free market, determines what goods should be produced, how much should be ...
  3. Prospectus

    A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details ...
  4. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest ...
  5. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  6. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
Trading Center