Category: Questions about Income
What does Active Participation mean?
Active participation is not the same as material participation. Active participation is a less stringent standard than material participation. For example, you may be treated as actively participating if you make management decisions in a significant and bona fide sense. Management decisions that count as active participation include approving new tenants, deciding on rental terms, approving capital or repair expenditures, and similar decisions.
Only individuals can actively participate in rental real estate activities. However, a decendent's estate is treated as actively participating for its tax years ending less than 2 years after the decendent's death, if the decedent would have satisfied the active participation requirement for the tax year the decendent died.
A decedents qualified revocable trust can also be treated as actively particpating if both the trustee and the executor (if any) of the estate choose to treat the trust as part of the estate. The choice applies to tax years ending after the decendent's death and before:
- 2 years after the decedent's death if no estate tax return is required, or
- 6 months after the estate tax liability is finally determined if an estate tax return is required.
The choice is irrevocable and cannot be made later than the due date for the estate's first income tax return (including extensions).
Limited partners are not treated as actively participating in a partnership's rental real estate activities.
You are not considered to actively participate if, at any time during the tax year, your interest (including your spouse's interest) in the activity was less than 10% by value of all interests in the activity. If you are a limited partner, you are also not treated as actively participating in a partnership's rental real estate activities.
For more information on Active Participation see IRS Publication 925