Amended 1987, 1988, 1990, 2014
- 2014 Pub. L. 113-295 Pub. L. 113–295, § 221(a)(60)(A), struck out subsec. (m) which related to a phase-in of disallowance of losses and credits for interest held before the date of enactment of the Tax Reform Act of 1986.
- 1990 Pub. L. 101-508 Pub. L. 101–508, § 11704(a)(6), substituted “pre-enactment” for “preenactment”.
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1005(a)(12), substituted “interest” for “interests” in heading.
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1005(a)(12), added par. (1) and struck out former par. (1) which read as follows: “In the case of any passive activity loss or credit for any taxable year beginning in calendar years 1987 through 1990 which—
“(A) is attributable to a pre-enactment interest, but
“(B) is not attributable to a carryforward to such taxable year of any loss or credit which was disallowed under this section for a preceding taxable year,
there shall be disallowed under subsection (a) only the applicable percentage of the amount which (but for this subsection) would have been disallowed under subsection (a) for such taxable year.”
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1005(a)(12), added par. (2) and struck out former par. (2) which resulted in substituting “65”, “40”, “20”, and “10” for “35”, “60”, “80”, and “90”, respectively, in second column.
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1005(a)(12), added subpar. (A) and struck out former subpar. (A) which read as follows: “The portion of the passive activity loss for any taxable year which is attributable to pre-enactment interests shall be equal to the lesser of—
“(i) the passive activity loss for such taxable year, or
“(ii) the passive activity loss for such taxable year determined by taking into account only pre-enactment interests.
For purposes of this subparagraph, the deduction equivalent (within the meaning of subsection (j)(5)) of a passive activity credit shall be taken into account.”
- 1987 Pub. L. 100-203 Pub. L. 100–203 added subsec. (k) and redesignated former subsecs. (k) and (l) as (l) and (m), respectively.
Cases: Sidell v. Commissioner, 225 F.3d 103 (1st Cir. 2000); Fransen v. United States, 191 F.3d 599 (5th Cir. 1999)
Forms: Form 1099-DIV; Form W-2
Final rules 7
(a) Disallowance
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(1) In general If for any taxable year the taxpayer is described in paragraph (2), neither—
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(A) the passive activity loss, nor
for the taxable year shall be allowed.
(2) Persons described The following are described in this paragraph:
(A) any individual, estate, or trust,
(B) any closely held C corporation, and
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(b) Disallowed loss or credit carried to next year Except as otherwise provided in this section, any loss or credit from an activity which is disallowed under subsection (a) shall be treated as a deduction or credit allocable to such activity in the next taxable year.
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(c) Passive activity defined For purposes of this section—
Cases: Moss v. Commissioner, 135 T.C. 365 (2010)
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(1) In general The term “passive activity” means any activity—
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(A) which involves the conduct of any trade or business, and
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(B) in which the taxpayer does not materially participate.
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(2) Passive activity includes any rental activity Except as provided in paragraph (7), the term “passive activity” includes any rental activity.
Amended 1993
- 1993 Pub. L. 103-66 Pub. L. 103–66, § 13143(b)(1), substituted “Except as provided in paragraph (7), the” for “The”.
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(3) Working interests in oil and gas property
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(A) In general The term “passive activity” shall not include any working interest in any oil or gas property which the taxpayer holds directly or through an entity which does not limit the liability of the taxpayer with respect to such interest.
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(B) Income in subsequent years If any taxpayer has any loss for any taxable year from a working interest in any oil or gas property which is treated as a loss which is not from a passive activity, then any net income from such property (or any property the basis of which is determined in whole or in part by reference to the basis of such property) for any succeeding taxable year shall be treated as income of the taxpayer which is not from a passive activity. If the preceding sentence applies to the net income from any property for any taxable year, any credits allowable under subpart B (other than section 27) or D of part IV of subchapter A for such taxable year which are attributable to such property shall be treated as credits not from a passive activity to the extent the amount of such credits does not exceed the regular tax liability of the taxpayer for the taxable year which is allocable to such net income.
Amended 1996, 2018
- 2018 Pub. L. 115-141 Pub. L. 115–141, § 401(d)(1)(D)(ii), substituted “27” for “27(a)”.
- 1996 Pub. L. 104-188 Pub. L. 104–188, § 1704(d)(1), inserted at end “If the preceding sentence applies to the net income from any property for any taxable year, any credits allowable under subpart B (other than section 27(a)) or D of part IV of subchapter A for such taxable year which are attributable to such property shall be treated as credits not from a passive activity to the extent the amount of such credits does not exceed the regular tax liability of the taxpayer for the taxable year which is allocable to such net income.”
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(4) Material participation not required for paragraphs (2) and (3) Paragraphs (2) and (3) shall be applied without regard to whether or not the taxpayer materially participates in the activity.
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(5) Trade or business includes research and experimentation activity For purposes of paragraph (1)(A), the term “trade or business” includes any activity involving research or experimentation (within the meaning of section 174).
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(6) Activity in connection with trade or business or production of income To the extent provided in regulations, for purposes of paragraph (1)(A), the term “trade or business” includes—
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(A) any activity in connection with a trade or business, or
(B) any activity with respect to which expenses are allowable as a deduction under section 212.
(7) Special rules for taxpayers in real property business
(A) In general If this paragraph applies to any taxpayer for a taxable year—
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(i) paragraph (2) shall not apply to any rental real estate activity of such taxpayer for such taxable year, and
(ii) this section shall be applied as if each interest of the taxpayer in rental real estate were a separate activity.
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Notwithstanding clause (ii), a taxpayer may elect to treat all interests in rental real estate as one activity. Nothing in the preceding provisions of this subparagraph shall be construed as affecting the determination of whether the taxpayer materially participates with respect to any interest in a limited partnership as a limited partner.
(B) Taxpayers to whom paragraph applies This paragraph shall apply to a taxpayer for a taxable year if—
(i) more than one-half of the personal services performed in trades or businesses by the taxpayer during such taxable year are performed in real property trades or businesses in which the taxpayer materially participates, and
(ii) such taxpayer performs more than 750 hours of services during the taxable year in real property trades or businesses in which the taxpayer materially participates.
In the case of a joint return, the requirements of the preceding sentence are satisfied if and only if either spouse separately satisfies such requirements. For purposes of the preceding sentence, activities in which a spouse materially participates shall be determined under subsection (h).
(C) Real property trade or business For purposes of this paragraph, the term “real property trade or business” means any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.
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(D) Special rules for subparagraph (B)
(i) Closely held C corporations In the case of a closely held C corporation, the requirements of subparagraph (B) shall be treated as met for any taxable year if more than 50 percent of the gross receipts of such corporation for such taxable year are derived from real property trades or businesses in which the corporation materially participates.
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(ii) Personal services as an employee For purposes of subparagraph (B), personal services performed as an employee shall not be treated as performed in real property trades or businesses. The preceding sentence shall not apply if such employee is a 5-percent owner (as defined in section 416(i)(1)(B)) in the employer.
(d) Passive activity loss and credit defined For purposes of this section—
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(1) Passive activity loss The term “passive activity loss” means the amount (if any) by which—
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(A) the aggregate losses from all passive activities for the taxable year, exceed
(B) the aggregate income from all passive activities for such year.
(2) Passive activity credit The term “passive activity credit” means the amount (if any) by which—
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(A) the sum of the credits from all passive activities allowable for the taxable year under—
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(i) subpart D of part IV of subchapter A, or
(ii) subpart B (other than section 27) of such part IV, exceeds
Amended 2018
- 2018 Pub. L. 115-141 Pub. L. 115–141, § 401(d)(1)(D)(ii), substituted “27” for “27(a)”.
(B) the regular tax liability of the taxpayer for the taxable year allocable to all passive activities.
(e) Special rules for determining income or loss from a passive activity For purposes of this section—
(1) Certain income not treated as income from passive activity In determining the income or loss from any activity—
(A) In general There shall not be taken into account—
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(i) any—
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(I) gross income from interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business,
(II) expenses (other than interest) which are clearly and directly allocable to such gross income, and
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(III) interest expense properly allocable to such gross income, and
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(ii) gain or loss not derived in the ordinary course of a trade or business which is attributable to the disposition of property—
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1005(a)(1), inserted “not derived in the ordinary course of a trade or business which is” after “gain or loss”.
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(I) producing income of a type described in clause (i), or
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(II) held for investment.
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For purposes of clause (ii), any interest in a passive activity shall not be treated as property held for investment.
(B) Return on working capital For purposes of subparagraph (A), any income, gain, or loss which is attributable to an investment of working capital shall be treated as not derived in the ordinary course of a trade or business.
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(2) Passive losses of certain closely held corporations may offset active income
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(A) In general If a closely held C corporation (other than a personal service corporation) has net active income for any taxable year, the passive activity loss of such taxpayer for such taxable year (determined without regard to this paragraph)—
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(i) shall be allowable as a deduction against net active income, and
(ii) shall not be taken into account under subsection (a) to the extent so allowable as a deduction.
A similar rule shall apply in the case of any passive activity credit of the taxpayer.
(B) Net active income For purposes of this paragraph, the term “net active income” means the taxable income of the taxpayer for the taxable year determined without regard to—
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(i) any income or loss from a passive activity, and
(ii) any item of gross income, expense, gain, or loss described in paragraph (1)(A).
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(3) Compensation for personal services Earned income (within the meaning of section 911(d)(2)(A)) shall not be taken into account in computing the income or loss from a passive activity for any taxable year.
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(4) Dividends reduced by dividends received deduction For purposes of paragraphs (1) and (2), income from dividends shall be reduced by the amount of any dividends received deduction under section 243 or 245.
Amended 2014
- 2014 Pub. L. 113-295 Pub. L. 113–295, § 221(a)(41)(G), struck out “, 244,” after “section 243”.
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(f) Treatment of former passive activities For purposes of this section—
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(1) In general If an activity is a former passive activity for any taxable year—
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(A) any unused deduction allocable to such activity under subsection (b) shall be offset against the income from such activity for the taxable year,
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(B) any unused credit allocable to such activity under subsection (b) shall be offset against the regular tax liability (computed after the application of paragraph (1)) allocable to such activity for the taxable year, and
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(C) any such deduction or credit remaining after the application of subparagraphs (A) and (B) shall continue to be treated as arising from a passive activity.
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(2) Change in status of closely held C corporation or personal service corporation If a taxpayer ceases for any taxable year to be a closely held C corporation or personal service corporation, this section shall continue to apply to losses and credits to which this section applied for any preceding taxable year in the same manner as if such taxpayer continued to be a closely held C corporation or personal service corporation, whichever is applicable.
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(3) Former passive activity The term “former passive activity” means any activity which, with respect to the taxpayer—
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(A) is not a passive activity for the taxable year, but
(B) was a passive activity for any prior taxable year.
(g) Dispositions of entire interest in passive activity If during the taxable year a taxpayer disposes of his entire interest in any passive activity (or former passive activity), the following rules shall apply:
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(1) Fully taxable transaction
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(A) In general If all gain or loss realized on such disposition is recognized, the excess of—
Amended 1988, 1996
- 1996 Pub. L. 104-188 Pub. L. 104–188, § 1704(e)(1), reenacted heading without change and amended text generally. Prior to amendment, text read as follows: “If all gain or loss realized on such disposition is recognized, the excess of—
“(i) the sum of—
“(I) any loss from such activity for such taxable year (determined after application of subsection (b)), plus
“(II) any loss realized on such disposition, over
“(ii) net income or gain for such taxable year from all passive activities (determined without regard to losses described in clause (i)),
shall be treated as a loss which is not from a passive activity.”
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1005(a)(2)(A), amended subpar. (A) generally. Prior to amendment, subpar. (A) read as follows: “If all gain or loss realized on such disposition is recognized, any loss from such activity which has not previously been allowed as a deduction (and in the case of a passive activity for the taxable year, any loss realized on such disposition) shall not be treated as a passive activity loss and shall be allowable as a deduction against income in the following order:
“(i) Income or gain from the passive activity for the taxable year (including any gain recognized on the disposition).
“(ii) Net income or gain for the taxable year from all passive activities.
“(iii) Any other income or gain.”
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(i) any loss from such activity for such taxable year (determined after the application of subsection (b)), over
(ii) any net income or gain for such taxable year from all other passive activities (determined after the application of subsection (b)),
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shall be treated as a loss which is not from a passive activity.
(B) Subparagraph (A) not to apply to disposition involving related party If the taxpayer and the person acquiring the interest bear a relationship to each other described in section 267(b) or section 707(b)(1), then subparagraph (A) shall not apply to any loss of the taxpayer until the taxable year in which such interest is acquired (in a transaction described in subparagraph (A)) by another person who does not bear such a relationship to the taxpayer.
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(C) Income from prior years To the extent provided in regulations, income or gain from the activity for preceding taxable years shall be taken into account under subparagraph (A)(ii) for the taxable year to the extent necessary to prevent the avoidance of this section.
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1005(a)(2)(B), substituted “Income from prior years” for “Coordination with section 1211” in heading and amended text generally. Prior to amendment, text read as follows: “In the case of any loss realized on the disposition of an interest in a passive activity, section 1211 shall be applied before subparagraph (A) is applied.”
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(2) Disposition by death If an interest in the activity is transferred by reason of the death of the taxpayer—
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(A) paragraph (1)(A) shall apply to losses described in paragraph (1)(A) to the extent such losses are greater than the excess (if any) of—
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1005(a)(3), substituted “paragraph (1)(A)” for “paragraph (1)” and “to losses described in paragraph (1)(A)” for “to such losses”.
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(i) the basis of such property in the hands of the transferee, over
(ii) the adjusted basis of such property immediately before the death of the taxpayer, and
(B) any losses to the extent of the excess described in subparagraph (A) shall not be allowed as a deduction for any taxable year.
(3) Installment sale of entire interest In the case of an installment sale of an entire interest in an activity to which section 453 applies, paragraph (1) shall apply to the portion of such losses for each taxable year which bears the same ratio to all such losses as the gain recognized on such sale during such taxable year bears to the gross profit from such sale (realized or to be realized when payment is completed).
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1005(a)(4), substituted “(realized or to be realized” for “realized (or to be realized)” and “is completed)” for “is completed”.
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(h) Material participation defined For purposes of this section—
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(1) In general A taxpayer shall be treated as materially participating in an activity only if the taxpayer is involved in the operations of the activity on a basis which is—
(A) regular,
(B) continuous, and
(C) substantial.
(2) Interests in limited partnerships Except as provided in regulations, no interest in a limited partnership as a limited partner shall be treated as an interest with respect to which a taxpayer materially participates.
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Cases: Garnett v. Commissioner, 132 T.C. 368 (2009); Thompson v. United States, 87 Fed. Cl. 728 (2009)
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(3) Treatment of certain retired individuals and surviving spouses A taxpayer shall be treated as materially participating in any farming activity for a taxable year if paragraph (4) or (5) of section 2032A(b) would cause the requirements of section 2032A(b)(1)(C)(ii) to be met with respect to real property used in such activity if such taxpayer had died during the taxable year.
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(4) Certain closely held C corporations and personal service corporations A closely held C corporation or personal service corporation shall be treated as materially participating in an activity only if—
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1005(a)(5), inserted “only” before “if”.
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(A) 1 or more shareholders holding stock representing more than 50 percent (by value) of the outstanding stock of such corporation materially participate in such activity, or
(B) in the case of a closely held C corporation (other than a personal service corporation), the requirements of section 465(c)(7)(C) (without regard to clause (iv)) are met with respect to such activity.
(5) Participation by spouse In determining whether a taxpayer materially participates, the participation of the spouse of the taxpayer shall be taken into account.
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(i) $25,000 offset for rental real estate activities
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(1) In general In the case of any natural person, subsection (a) shall not apply to that portion of the passive activity loss or the deduction equivalent (within the meaning of subsection (j)(5)) of the passive activity credit for any taxable year which is attributable to all rental real estate activities with respect to which such individual actively participated in such taxable year (and if any portion of such loss or credit arose in another taxable year, in such other taxable year).
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1005(a)(6), substituted “in such taxable year (and if any portion of such loss or credit arose in another taxable year, in such other taxable year)” for “in the taxable year in which such portion of such loss or credit arose”.
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(2) Dollar limitation The aggregate amount to which paragraph (1) applies for any taxable year shall not exceed $25,000.
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(3) Phase-out of exemption
Amended 2000, 2001, 2004, 2017, 2018
- 2018 Pub. L. 115-141 Pub. L. 115–141, § 401(d)(5)(B)(i), redesignated subpar. (F) as (E). Former subpar. (E) redesignated (D).
- 2017 Pub. L. 115-97 Pub. L. 115–97, § 14202(b)(3), substituted “222, and 250” for “and 222”.
- 2017 Pub. L. 115-97 Pub. L. 115–97, § 13305(b)(1), struck out “199,” after “sections”.
- 2004 Pub. L. 108-357 Pub. L. 108–357, § 102(d)(5), inserted “199,” before “219,”.
- 2001 Pub. L. 107-16 Pub. L. 107–16 substituted “, 221, and 222” for “and 221”.
- 2000 Pub. L. 106-554 Pub. L. 106–554, § 1(a)(7) [title I, § 101(b)(1), (2)], added subpar. (C), redesignated former subpars. (C) to (E) as (D) to (F), respectively, and generally amended heading and text of subpar. (E), as redesignated. Prior to amendment, text read as follows: “If subparagraph (B) or (C) applies for any taxable year, paragraph (1) shall be applied—
“(i) first to the passive activity loss,
“(ii) second to the portion of the passive activity credit to which subparagraph (B) or (C) does not apply,
“(iii) third to the portion of such credit to which subparagraph (B) applies, and
“(iv) then to the portion of such credit to which subparagraph (C) applies.”
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(A) In general In the case of any taxpayer, the $25,000 amount under paragraph (2) shall be reduced (but not below zero) by 50 percent of the amount by which the adjusted gross income of the taxpayer for the taxable year exceeds $100,000.
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(B) Special phase-out of rehabilitation credit In the case of any portion of the passive activity credit for any taxable year which is attributable to the rehabilitation credit determined under section 47, subparagraph (A) shall be applied by substituting “$200,000” for “$100,000”.
Amended 1989, 1990
- 1990 Pub. L. 101-508 Pub. L. 101–508, § 11813(b)(16)(A), substituted “rehabilitation credit determined under section 47” for “rehabilitation investment credit (within the meaning of section 48(o))”.
- 1989 Pub. L. 101-239 Pub. L. 101–239 added subpars. (B) and (C) and struck out former subpars. (B) and (C) which read as follows:
- 1989 “(B) Special phase-out of low-income housing and rehabilitation credits.—In the case of any portion of the passive activity credit for any taxable year which is attributable to any credit to which paragraph (6)(B) applies, subparagraph (A) shall be applied by substituting ‘$200,000’ for ‘$100,000’.
- 1989 “(C) Ordering rule to reflect separate phase-outs.—If subparagraph (B) applies for any taxable year, paragraph (1) shall be applied—
“(i) first to the passive activity loss,
“(ii) second to the portion of the passive activity credit to which subparagraph (B) does not apply, and
“(iii) then to the portion of such credit to which subparagraph (B) applies.”
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(C) Exception for low-income housing credit Subparagraph (A) shall not apply to any portion of the passive activity credit for any taxable year which is attributable to any credit determined under section 42.
Amended 1989, 2000, 2018
- 2018 Pub. L. 115-141 Pub. L. 115–141, § 401(d)(5)(B)(i), redesignated subpar. (D) as (C) and struck out former subpar. (C). Prior to amendment, text of subpar. (C) read as follows: “Subparagraph (A) shall not apply to any portion of the passive activity loss for any taxable year which is attributable to the commercial revitalization deduction under section 1400I.”
- 2000 Pub. L. 106-554 Pub. L. 106–554, § 1(a)(7) [title I, § 101(b)(1), (2)], added subpar. (C), redesignated former subpars. (C) to (E) as (D) to (F), respectively, and generally amended heading and text of subpar. (E), as redesignated. Prior to amendment, text read as follows: “If subparagraph (B) or (C) applies for any taxable year, paragraph (1) shall be applied—
“(i) first to the passive activity loss,
“(ii) second to the portion of the passive activity credit to which subparagraph (B) or (C) does not apply,
“(iii) third to the portion of such credit to which subparagraph (B) applies, and
“(iv) then to the portion of such credit to which subparagraph (C) applies.”
- 1989 Pub. L. 101-239 Pub. L. 101–239 added subpars. (B) and (C) and struck out former subpars. (B) and (C) which read as follows:
- 1989 “(B) Special phase-out of low-income housing and rehabilitation credits.—In the case of any portion of the passive activity credit for any taxable year which is attributable to any credit to which paragraph (6)(B) applies, subparagraph (A) shall be applied by substituting ‘$200,000’ for ‘$100,000’.
- 1989 “(C) Ordering rule to reflect separate phase-outs.—If subparagraph (B) applies for any taxable year, paragraph (1) shall be applied—
“(i) first to the passive activity loss,
“(ii) second to the portion of the passive activity credit to which subparagraph (B) does not apply, and
“(iii) then to the portion of such credit to which subparagraph (B) applies.”
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(D) Ordering rule Paragraph (1) shall be applied for any taxable year—
Amended 1988, 1989, 2000, 2018
- 2018 Pub. L. 115-141 Pub. L. 115–141, § 401(d)(5)(B)(i), (ii), redesignated subpar. (E) as (D) and amended it generally. Prior to amendment, subpar. related to ordering rules to reflect exceptions and separate phase-outs. Former subpar. (D) redesignated (C).
- 2000 Pub. L. 106-554 Pub. L. 106–554, § 1(a)(7) [title I, § 101(b)(1), (2)], added subpar. (C), redesignated former subpars. (C) to (E) as (D) to (F), respectively, and generally amended heading and text of subpar. (E), as redesignated. Prior to amendment, text read as follows: “If subparagraph (B) or (C) applies for any taxable year, paragraph (1) shall be applied—
“(i) first to the passive activity loss,
“(ii) second to the portion of the passive activity credit to which subparagraph (B) or (C) does not apply,
“(iii) third to the portion of such credit to which subparagraph (B) applies, and
“(iv) then to the portion of such credit to which subparagraph (C) applies.”
- 1989 Pub. L. 101-239 Pub. L. 101–239 added subpar. (D) and redesignated former subpar. (D) as (E).
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 6009(c)(3), added cl. (ii) and redesignated former cls. (ii) and (iii) as (iii) and (iv), respectively.
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(i) first, to the passive activity loss,
(ii) second, to the portion of the passive activity credit to which subparagraph (B) and [OLRC note: So in original. Probably should be “or”.] (C) does not apply,
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(iii) third, to the portion of such credit to which subparagraph (B) applies, and
(iv) then, to the portion of such credit to which subparagraph (C) applies.
(E) Adjusted gross income For purposes of this paragraph, adjusted gross income shall be determined without regard to—
Amended 1989, 2000, 2018
- 2018 Pub. L. 115-141 Pub. L. 115–141, § 401(d)(5)(B)(i), redesignated subpar. (F) as (E). Former subpar. (E) redesignated (D).
- 2000 Pub. L. 106-554 Pub. L. 106–554, § 1(a)(7) [title I, § 101(b)(1), (2)], added subpar. (C), redesignated former subpars. (C) to (E) as (D) to (F), respectively, and generally amended heading and text of subpar. (E), as redesignated. Prior to amendment, text read as follows: “If subparagraph (B) or (C) applies for any taxable year, paragraph (1) shall be applied—
“(i) first to the passive activity loss,
“(ii) second to the portion of the passive activity credit to which subparagraph (B) or (C) does not apply,
“(iii) third to the portion of such credit to which subparagraph (B) applies, and
“(iv) then to the portion of such credit to which subparagraph (C) applies.”
- 1989 Pub. L. 101-239 Pub. L. 101–239 added subpar. (D) and redesignated former subpar. (D) as (E).
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(i) any amount includible in gross income under section 86,
(ii) the amounts excludable from gross income under sections 85(c), 135, and 137,
Amended 1996, 2002, 2021
- 2021 Pub. L. 117-2 Pub. L. 117–2 substituted “85(c), 135, and 137” for “135 and 137”.
- 2002 Pub. L. 107-147 Pub. L. 107–147 added cls. (ii) to (iv) and struck out former cls. (ii) to (iv) which read as follows:
- 2002 “(ii) second to the portion of the passive activity credit to which subparagraph (B) or (D) does not apply,
- 2002 “(iii) third to the portion of such credit to which subparagraph (B) applies,
- 2002 “(iv) fourth to the portion of such loss to which subparagraph (C) applies, and”.
- 1996 Pub. L. 104-188 Pub. L. 104–188, § 1807(c)(4), amended cl. (ii) generally. Prior to amendment, cl. (ii) read as follows: “the amount excludable from gross income under section 135,”.
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(iii) the amounts allowable as a deduction under sections 219, 221, and 250, and
Amended 1998, 2002, 2020
- 2020 Pub. L. 116-260 Pub. L. 116–260 struck out “222,” after “221,”.
- 2002 Pub. L. 107-147 Pub. L. 107–147 added cls. (ii) to (iv) and struck out former cls. (ii) to (iv) which read as follows:
- 2002 “(ii) second to the portion of the passive activity credit to which subparagraph (B) or (D) does not apply,
- 2002 “(iii) third to the portion of such credit to which subparagraph (B) applies,
- 2002 “(iv) fourth to the portion of such loss to which subparagraph (C) applies, and”.
- 1998 Pub. L. 105-277 Pub. L. 105–277 amended cl. (iii) generally. Prior to amendment, cl. (iii) read as follows: “any amount allowable as a deduction under section 219, and”.
(iv) any passive activity loss or any loss allowable by reason of subsection (c)(7).
Amended 1993, 2002
- 2002 Pub. L. 107-147 Pub. L. 107–147 added cls. (ii) to (iv) and struck out former cls. (ii) to (iv) which read as follows:
- 2002 “(ii) second to the portion of the passive activity credit to which subparagraph (B) or (D) does not apply,
- 2002 “(iii) third to the portion of such credit to which subparagraph (B) applies,
- 2002 “(iv) fourth to the portion of such loss to which subparagraph (C) applies, and”.
- 1993 Pub. L. 103-66 Pub. L. 103–66, § 13143(b)(2), inserted “or any loss allowable by reason of subsection (c)(7)” after “loss”.
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(4) Special rule for estates
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(A) In general In the case of taxable years of an estate ending less than 2 years after the date of the death of the decedent, this subsection shall apply to all rental real estate activities with respect to which such decedent actively participated before his death.
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(B) Reduction for surviving spouse’s exemption For purposes of subparagraph (A), the $25,000 amount under paragraph (2) shall be reduced by the amount of the exemption under paragraph (1) (without regard to paragraph (3)) allowable to the surviving spouse of the decedent for the taxable year ending with or within the taxable year of the estate.
(5) Married individuals filing separately
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(A) In general Except as provided in subparagraph (B), in the case of any married individual filing a separate return, this subsection shall be applied by substituting—
(i) “$12,500” for “$25,000” each place it appears,
(ii) “$50,000” for “$100,000” in paragraph (3)(A), and
(iii) “$100,000” for “$200,000” in paragraph (3)(B).
(6) Active participation
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(A) In general An individual shall not be treated as actively participating with respect to any interest in any rental real estate activity for any period if, at any time during such period, such interest (including any interest of the spouse of the individual) is less than 10 percent (by value) of all interests in such activity.
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(B) No participation requirement for low-income housing or rehabilitation credit Paragraphs (1) and (4)(A) shall be applied without regard to the active participation requirement in the case of—
Amended 2000, 2018
- 2018 Pub. L. 115-141 Pub. L. 115–141, § 401(d)(5)(B)(iii)(I), substituted “or rehabilitation credit” for “, rehabilitation credit, or commercial revitalization deduction” in heading.
- 2018 Pub. L. 115-141 Pub. L. 115–141, § 401(d)(5)(B)(iii)(II)–(IV), struck out cl. (iii) which read as follows: “any deduction under section 1400I (relating to commercial revitalization deduction).”
- 2000 Pub. L. 106-554 Pub. L. 106–554, § 1(a)(7) [title I, § 101(b)(3)(B)], substituted “, rehabilitation credit, or commercial revitalization deduction” for “or rehabilitation credit” in heading.
- 2000 Pub. L. 106-554 Pub. L. 106–554, § 1(a)(7) [title I, § 101(b)(3)(A)], added cl. (iii).
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(i) any credit determined under section 42 for any taxable year, or
(ii) any rehabilitation credit determined under section 47, [OLRC note: So in original. The comma probably should be a period.]
Amended 1990
- 1990 Pub. L. 101-508 Pub. L. 101–508, § 11813(b)(16)(A), substituted “rehabilitation credit determined under section 47” for “rehabilitation investment credit (within the meaning of section 48(o))”.
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(C) Interest as a limited partner Except as provided in regulations, no interest as a limited partner in a limited partnership shall be treated as an interest with respect to which the taxpayer actively participates.
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1005(a)(7), substituted “Except as provided in regulations, no” for “No”.
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(D) Participation by spouse In determining whether a taxpayer actively participates, the participation of the spouse of the taxpayer shall be taken into account.
(j) Other definitions and special rules For purposes of this section—
(1) Closely held C corporation The term “closely held C corporation” means any C corporation described in section 465(a)(1)(B).
(2) Personal service corporation The term “personal service corporation” has the meaning given such term by section 269A(b)(1), except that section 269A(b)(2) shall be applied—
(A) by substituting “any” for “more than 10 percent”, and
(B) by substituting “any” for “50 percent or more in value” in section 318(a)(2)(C).
A corporation shall not be treated as a personal service corporation unless more than 10 percent of the stock (by value) in such corporation is held by employee-owners (within the meaning of section 269A(b)(2), as modified by the preceding sentence).
(3) Regular tax liability The term “regular tax liability” has the meaning given such term by section 26(b).
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(4) Allocation of passive activity loss and credit The passive activity loss and the passive activity credit (and the $25,000 amount under subsection (i)) shall be allocated to activities, and within activities, on a pro rata basis in such manner as the Secretary may prescribe.
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(5) Deduction equivalent The deduction equivalent of credits from a passive activity for any taxable year is the amount which (if allowed as a deduction) would reduce the regular tax liability for such taxable year by an amount equal to such credits.
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(6) Special rule for gifts In the case of a disposition of any interest in a passive activity by gift—
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(A) the basis of such interest immediately before the transfer shall be increased by the amount of any passive activity losses allocable to such interest with respect to which a deduction has not been allowed by reason of subsection (a), and
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1005(a)(8), inserted “with respect to which a deduction has not been allowed by reason of subsection (a)” after “to such interest”.
(B) such losses shall not be allowable as a deduction for any taxable year.
(7) Qualified residence interest The passive activity loss of a taxpayer shall be computed without regard to qualified residence interest (within the meaning of section 163(h)(3)).
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(8) Rental activity The term “rental activity” means any activity where payments are principally for the use of tangible property.
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(9) Election to increase basis of property by amount of disallowed credit For purposes of determining gain or loss from a disposition of any property to which subsection (g)(1) applies, the transferor may elect to increase the basis of such property immediately before the transfer by an amount equal to the portion of any unused credit allowable under this chapter which reduced the basis of such property for the taxable year in which such credit arose. If the taxpayer elects the application of this paragraph, such portion of the passive activity credit of such taxpayer shall not be allowed for any taxable year.
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(10) Coordination with section 280A If a passive activity involves the use of a dwelling unit to which section 280A(c)(5) applies for any taxable year, any income, deduction, gain, or loss allocable to such use shall not be taken into account for purposes of this section for such taxable year.
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1005(a)(9), added pars. (10) and (11).
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(11) Aggregation of members of affiliated groups Except as provided in regulations, all members of an affiliated group which files a consolidated return shall be treated as 1 corporation.
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1005(a)(9), added pars. (10) and (11).
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(12) Special rule for distributions by estates or trusts If any interest in a passive activity is distributed by an estate or trust—
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1005(a)(11), added par. (12).
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(A) the basis of such interest immediately before such distribution shall be increased by the amount of any passive activity losses allocable to such interest, and
(B) such losses shall not be allowable as a deduction for any taxable year.
(k) Separate application of section in case of publicly traded partnerships
Amended 1987
- 1987 Pub. L. 100-203 Pub. L. 100–203 added subsec. (k) and redesignated former subsecs. (k) and (l) as (l) and (m), respectively.
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(1) In general This section shall be applied separately with respect to items attributable to each publicly traded partnership (and subsection (i) shall not apply with respect to items attributable to any such partnership). The preceding sentence shall not apply to any credit determined under section 42, or any rehabilitation credit determined under section 47, attributable to a publicly traded partnership to the extent the amount of any such credits exceeds the regular tax liability attributable to income from such partnership.
Amended 1990
- 1990 Pub. L. 101-508 Pub. L. 101–508, § 11813(b)(16)(B), substituted “rehabilitation credit determined under section 47” for “rehabilitation investment credit (within the meaning of section 48(o))”.
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(2) Publicly traded partnership For purposes of this section, the term “publicly traded partnership” means any partnership if—
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(A) interests in such partnership are traded on an established securities market, or
(B) interests in such partnership are readily tradable on a secondary market (or the substantial equivalent thereof).
(3) Coordination with subsection (g) For purposes of subsection (g), a taxpayer shall not be treated as having disposed of his entire interest in an activity of a publicly traded partnership until he disposes of his entire interest in such partnership.
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 2004(g), added par. (3).
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(4) Application to regulated investment companies For purposes of this section, a regulated investment company (as defined in section 851) holding an interest in a qualified publicly traded partnership (as defined in section 851(h)) shall be treated as a taxpayer described in subsection (a)(2) with respect to items attributable to such interest.
Amended 2004
- 2004 Pub. L. 108-357 Pub. L. 108–357, § 331(g), added par. (4).
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(l) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out provisions of this section, including regulations—
Amended 1987
- 1987 Pub. L. 100-203 Pub. L. 100–203 added subsec. (k) and redesignated former subsecs. (k) and (l) as (l) and (m), respectively.
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(1) which specify what constitutes an activity, material participation, or active participation for purposes of this section,
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(2) which provide that certain items of gross income will not be taken into account in determining income or loss from any activity (and the treatment of expenses allocable to such income),
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(3) requiring net income or gain from a limited partnership or other passive activity to be treated as not from a passive activity,
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Cases: Krukowski v. Commissioner, 279 F.3d 547 (7th Cir. 2002)
(4) which provide for the determination of the allocation of interest expense for purposes of this section, and
(5) which deal with changes in marital status and changes between joint returns and separate returns.