Chapter 14 - Passive Activity Rules

Question 1

Wages, salary, commissions, bonuses, and other payments for services rendered by the taxpayer.

Profit from a trade or business in which the taxpayer is a material participant.

Gain on the sale or other disposition of assets used in an active trade or business.

Income from intangible property if the taxpayer’s personal efforts significantly contributed to the creation of the property.

Answer 1

Active “Ordinary” Income

Question 2

Interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business.

Gain or loss from the disposition of property that produces portfolio income or is held for investment purposes.

Answer 2

Portfolio Income

Question 3

Any trade or business or income-producing activity in which the taxpayer does not materially participate.

Subject to certain exceptions, all rental activities, whether the taxpayer materially participates or not.

Answer 3

Passive Income

Question 4

Passive income or loss is derived from the conduct of a passive activity.

In which the taxpayer does not “materially participate”,

That is a limited partnership interest, or

That is a rental activity, even if the taxpayer materially participates in the activity.

Answer 4

Passive Activities

Question 5

Material participation is defined as:

> 500 hours devoted to activity or,

> 100 hours devoted to activity and the most of any participant or,

> 100 hours devoted to several activities that add up to more than 500 hours.

Answer 5

Material Participation

Question 6

To make the tax rules surrounding the use of passive activities a bit more user-friendly, it is possible to group several passive activities into an “appropriate economic unit.”

Once grouped into an appropriate economic unit, the limitations imposed on passive activities, including the materiality rules, will apply on a group basis, as opposed to per-unit basis.

Answer 6

Grouping of Passive Activities

Question 7

Customer use 7 days.

Customer use 30 days and personal services provided.

Extraordinary personal services are provided.

Rental activities incidental to non-rental activity.

Rental activity available during business hours for nonexclusive use of customers.

Rental property used in activity conducted by partnership, etc. where taxpayer is owner and active participant.

Answer 7

Rental Property Exceptions for Passive Income