Definition of "Active participation"

Carmen Lovelace and  Libby Bryant real estate agent

Written by

Carmen Lovelace and Libby Bryantelite badge icon

RE/MAX Town Center

To define active participation, we have to look at owning residential rental real estate. Activities that handle rental real estate are considered passive activities and are affected by the limitations for losses that come from passive activities. How much a taxpayer participates in the passive activity determines the impact their losses and incomes will get on their tax return. There are three levels of involvement: Active, Material, and Real Estate Professional. The first two are treated as passive activities, but the real estate professional is not.

Active participation in real estate is the involvement in real estate ownership and management on a continuing basis as contrasted to material participation. As the added gains can be a great supplemental source of income, the added losses are the downturn. Those losses are why it is detrimental a rental owner establishes whether they are actively participating in their rental business or materially (passive) participating. The tax laws provide greater tax benefits when the owner actively participates in real estate property and rentals. We’ll see how below.

What does Active Participation mean?

Besides real estate professionals who are thoroughly involved in the management, marketing, and economic aspects of rental real estate, active or material participation are other ways to invest in real estate. The latter two are types of investment that generate income and losses also, but the way they are taxed depends on their level of involvement.

Active participation in real estate is not as stringent as material participation when it comes to taxes. It is a more commonly used type of involvement used by individuals as it has a special passive loss rule for rental activities. The IRS requires few rules for those that want to apply for deductions of losses. 

Firstly, the active participant must own at least 10% of the rental property jointly with their spouse. Their role within the rental property should include having made management decisions in the rental like approving new tenants, establishing rental terms, or signing off of expenditures.

Secondly, through active participation, a taxpayer is allowed to deduct up to $25,000. This value is decided by netting income and losses from the rental activities in which the taxpayer actively participates in. However, if the adjusted gross income (AGI) surpasses $100,000, the $25,000 special allowance is reduced to 50%, and if the AGI goes up to $150,000, the special allowance is reduced to zero.

image of a real estate dictionary page

Have a question or comment?

We're here to help.

*** Your email address will remain confidential.
 

 

Popular Real Estate Terms

A roof forming a triangle from the eaves to the ridge of the roof. ...

People say time is money. The old-age cliche applies more than ever in our case as we define what the Time Value of Money (TVM) means.  You’ll find the term time value for money ...

House made using standardized components that are preassembled on an assembly line in a factory rather than being built from "scratch" on a site. Normally, the prefabricate house is trucked ...

lease computed as a percentage of the underlying appraised property value. Under the terms of a reappraisal lease, the rent is periodically adjusted using an independent appraisal of the ...

The definition of reversion in real estate is the return of property or assets to their original owner after a prespecified event or occurrence. This real estate term is used primarily in ...

Directing the bank not to pay a check when presented at the bank. There is a service charge for this. If a contractor loses the check given to him, he may ask that the payor stop payment ...

Generally, a legal notice implies a method of official notification to an individual, organization, company, or the public that a particular event is about to occur. We can call a ...

In real estate terms, many consider having corner influence an extra financial advantage when it comes to transactions in most cases. Usually, enjoying a corner influence brings an ...

Documentation of zoning requirements and changes thereto. ...

Popular Real Estate Questions