active participation
active participation
An IRS term relating to passive activity losses that can be deducted only against passive activity income, not against ordinary income. Rental activities are always passive, unless you are a real estate professional.There is a small loophole—if you or your spouse actively participated in a passive rental real estate activity,you can still deduct up to $25,000 in rental activity losses from ordinary income.As a result,taxpayers are eager to prove they have active participation in their real estate investments so that large depreciation expenses, for example, can shelter income from other sources.Active participation can be shown if you make bona fide management decisions such as approving new tenants,deciding rental terms,approving expenditures,and similar activities. (See IRS Publication 925, “Passive Activity and At-Risk Rules” at the IRS Web site www.irs.gov.)