Don't overlook these!
Updated for 2012
Passive activity rules apply to:
Work you do in your capacity as an investor does not constitute participation unless you are directly involved in the day-to-day management or operations of the activity.
For example, the following work by an investor does not constitute participation:
The passive activity rules are designed to prevent passive activity losses from being deducted from a taxpayers nonpassive income, such as wages, interest and dividends.
In addition, passive activity credits may only be deducted from the tax on passive activity income.
Passive activity credits include the general business credit and other special business credits, such as the credit for fuel produced from a nonconventional source.
There are two kinds of passive activities:
Exception for real estate nonprofessionals:
Although rental activities are always considered passive activities (except for real estate professionals), a special rule allows real estate nonprofessionals to classify up to $25,000 of rental losses as nonpassive.
This means you can deduct up to $25,000 of rental losses from your other, nonpassive income. You must actively participate in the activity. It's easy to qualify for the special $25,000 allowance.
Here's how the Internal Revenue Code defines a passive activity:
Section 469(c) of the Internal Revenue Code defines a Passive Activity:
In general - The term "passive activity" means any activity - which involves the conduct of any trade or business, and in which the taxpayer does not materially participate.
The following tax forms apply to passive activity loss limitations and passive activity credit limitations:
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