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

An insurance policy that promises to pay all the legal obligations of the insured due to negligence in which damage to the property has been caused. ...

Structure that has the same blue print and design as all the other homes in a given development; the opposite of custom built. ...

The rate at which a market can absorb additional units of supply without causing market saturation and severe price distortions. For example, during a recessionary period, many homeowners ...

Right of a property owner located adjacent to an airfield to use the airspace above a certain distance to fly an airplane. However, the owner may not be allowed to put structures, signs or ...

Individual who will receive an inheritance upon the death of another. The proceeds of an insurance policy may be in a lump sum annuity. Real estate also passes to the beneficiary. ...

An insect, such as a termite, that "eats into" the wood and destroys it. This can cause significant damage to the home. Most states have laws that require termite inspection and ...

Final property appraisal estimate arrived at by applying appropriate appraisal methods. ...

Selling price for a property less assumed mortgages by the buyer. For tax purposes, the computation of the contract price is critical. ...

Codes are all around us, determining the logical flow of various events and processes. In the cycle of actions and consequences, codes are used as guidelines. The most commonly known codes ...

Popular Real Estate Questions