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

Single-family dwelling attached to other units by common walls. ...

A mortgage loan where the bank provides the mortgagor the required funds to purchase property the bank has obtained through foreclosure on outstanding mortgages. For example, John obtains a ...

Geographic location where a vacant or occupied structure exists. It usually means the land reserved is for a future building. ...

What is a turnkey property? A turnkey property is a very popular type of investment property that real estate investors prefer because it starts bringing a return on investment quickly. ...

In real estate, asking price is referred to as the amount set by the seller, the amount he/she wants to receive for the purchase of their home by the buyer. The asking price isn’t ...

The accelerated cost recovery system is a depreciation system for tax purposes mandated by the Economic Recovery Tax Act of 1981. In 1986 the Accelerated Cost Recovery System (ACRS) was ...

Charge assessed a mortgagor by the mortgagee when assuming a pre-existing mortgage. The assumption fee is often included in the closing costs when purchasing property. ...

Net operating income (NOI) of property relative to its market value. If rental income property worth $1,000,000 results in NOI of $100,000, the overall return is 10%. NOI compared to ...

If you're involved in real estate, whether buying, selling, or investing, you might have come across the term "alluvium." It's not just a fancy word but an important concept. Let's delve ...

Popular Real Estate Questions