What is 'Passive Activity'

Passive activity is 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.

BREAKING DOWN '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.

  1. Passive Activity Loss Rules

    Passive activity loss rules are a set of IRS rules that prohibits ...
  2. Passive Income

    A Passive income is earnings derived from a rental property, ...
  3. Material Participation Tests

    Material participation tests review taxpayer business activity ...
  4. Passive ETF

    A passive ETF is a method to invest in an entire index or sector ...
  5. Suspended Loss

    A capital loss that cannot be realized in a given tax year due ...
  6. Active Income

    Active income refers to income received from performing a service.
Related Articles
  1. Retirement

    Is Passive Investing Effective for Retirement Savings?

    Learn about the differences between active and passive investing for those approaching retirement. Discover how passive investing is gaining popularity.
  2. Investing

    How to Determine the Best Investment Strategy for You

    Before choosing passive or active investing for your portfolio, understand the differences.
  3. Investing

    Why Your Passive Fund Is Crushing Active Managers

    A new study shows passive funds outperformed over 5, 10 and 15 years
  4. Retirement

    Active vs. Passive Investing During Retirement

    How these two investing approaches work – and how to decide which best suits your precious nest egg.
  5. Investing

    Why Passive Investing Isn't Always a Winning Strategy

    New research suggests that passive investors don’t come out ahead all of the time, and active portfolio management still plays a viable role in investing.
  6. Investing

    5 Common Misconceptions About Passive Investing

    Be aware of these 5 misconceptions about passive investing when deciding between passive and active.
  7. Investing

    Why Its Sunset for Wall Street's Stock Pickers (JNS)

    Investors are abandoning actively managed mutual funds, hedge funds, ETFs and other vehicles at an accelerating rate in favor of passive funds
  8. Investing

    Funds with the Largest Inflows for September, 2016 (VTI, XLRE)

    As the third quarter drew to a close, investors continued to pour money into passive funds, while active funds battled heavy outflows.
  9. Investing

    4 Best Passive Income Investments

    Generating income from passive investments begins with knowing which ones are the best fit for your portfolio.
  1. Is the drugs sector better suited for active or passive investment?

    Learn how passive investing can make a person good money in the drugs sector, but shrewd active investing can make a person ... Read Answer >>
  2. Passive vs Active Portfolio Management

    Understand the difference between active portfolio management and passive portfolio management, and how each strategy benefits ... Read Answer >>
  3. Does index trading increase market vulnerability?

    Learn how the rise in popularity of passive ETFs and mutual funds tracking indexes has increased the correlation among stocks, ... Read Answer >>
Hot Definitions
  1. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  2. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  3. Entrepreneur

    An entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture.
  4. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  5. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  6. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
Trading Center