Active participation is a tax term commonly used for rental real estate activities. You are generally considered to actively participate if you are involved in making significant management decisions or arranging for others to provide services for the activity.
Examples of management decisions that indicate active participation include:
- Approving new tenants
- Deciding on rental terms
- Approving repair or capital improvement expenses
- Making other important management decisions related to the property
You don't need to handle every aspect of the rental yourself to meet the active participation standard. Even if you hire a property manager, you may still actively participate if you remain involved in key decision-making.
Active Participation vs. Material Participation
Active participation is a less restrictive standard than material participation.
In general:
- Active participation requires involvement in significant management decisions.
- Material participation requires a higher level of regular, continuous, and substantial involvement in the activity.
Because active participation is easier to satisfy, many rental property owners who aren't involved in day-to-day operations may still qualify as active participants.
Who Can Qualify for Active Participation?
Generally, only individuals can actively participate in rental real estate activities.
However, special rules may apply to:
- A decedent's estate
- Certain qualified revocable trusts
These entities may be treated as actively participating for a limited period following the property owner's death if specific IRS requirements are met.
When Are You Not Considered an Active Participant?
You are not considered to actively participate if:
- Your ownership interest (including your spouse's ownership interest) was less than 10% of the value of all interests in the activity at any time during the tax year.
- You are a limited partner in a partnership's rental real estate activity.
In these situations, you generally won't meet the active participation requirements, even if you are involved in some decisions.
Why Active Participation Matters
Active participation can affect your eligibility for certain tax benefits related to rental real estate activities, including the treatment of rental losses.
The IRS uses this standard to determine whether a taxpayer has enough involvement in a rental activity to qualify for specific deductions and loss allowances.
If you own rental property, it's important to accurately report your level of involvement so the program can apply the correct tax treatment.
Additional Information
For more information on Active Participation see IRS Publication 925.