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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.
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