PASSIVE INCOME TAX PROFESSIONAL

The individual materially participated in the activity for any five tax years (whether or not consecutive) during the 10 tax years that immediately precede the tax year The activity is a significant participation activity for the tax year, and the individual’s aggregate participation in all significant participation activities during such year exceeds 500 hours The individual participates in the activity for more than 100 hours during the tax year, and such individual’s participation in the activity for the tax year is not less than the participation in the activity of any other individual (including individuals who are not owners of interests in the activity) for such year The individual’s participation in the activity for the tax year constitutes substantially all of the participation in such activity of all individuals (including individuals who are not owners of interests in the activity) for such year The individual participates in the activity for more than 500 hours during the tax year 469(h)(1), (2), and (3)).Īn individual is treated as materially participating in an activity if he or she meets one of the following seven tests: Special limited rules exist for treating certain taxpayers as materially participating in a farming activity (Secs. Generally, no interest in a limited partnership as a limited partner is treated as an interest with respect to which a taxpayer materially participates.

469(c)(7)(B)).Ī taxpayer is treated as materially participating in an activity only if the taxpayer is involved in the operations of the activity on a basis that is regular, continuous, and substantial.

PASSIVE INCOME TAX PROFESSIONAL

469(a), (c)(2), and (c)(7)).Ī taxpayer qualifies as a real estate professional for any year the taxpayer meets both of the following requirements: (1) more than half of the personal services performed in all trades or businesses during the tax year were performed in real property trades or businesses in which the taxpayer materially participated and (2) the taxpayer performed more than 750 hours of services during the tax year in real property trades or businesses in which he or she materially participated (Sec. If a taxpayer qualifies as a real estate professional, however, the passive activity loss rules do not apply and losses from rental real estate activities are deductible against nonpassive income such as wages or Schedule C income (Secs. If there is no passive income against which to deduct a passive loss, the loss is carried over to the following year. Thus, the passive losses from such activities are usually only deductible against passive activity income. Rental activities are generally considered passive activities regardless of whether the taxpayer materially participates (Sec. A passive activity is an activity involving a trade or business in which the taxpayer does not materially participate.

Passive activity losses are only deductible against passive activity income. Second, it establishes whether income or gains from the real estate activities are subject to the net investment income tax.ĭeductibility of rental real estate losses First, it establishes whether the taxpayer can deduct losses from real estate activities against ordinary income. The importance of determining whether a taxpayer involved in real estate activities is a real estate professional is twofold.

Passive income tax