10.4 Participation May Avoid Passive Loss Restrictions

To avoid passive activity treatment of income and loss from a business investment, you must show material participation in that activity. The word “activity” does not necessarily relate to one specific business. If you invest in several businesses, you may be able to treat all or some of those activities as one activity or treat each separately.

Determining aggregate or separate treatment for your activities is discussed in 10.5 and material participation tests are discussed in 10.6.

For a rental activity, material participation tests apply only if you are trying to qualify for the passive activity exception for real estate professionals (10.3). For other rental real estate operators or investors, an “active” participation test that requires only certain management duties may allow you to deduct rental losses of up to $25,000 (10.2).