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Act Week ive income income der ived fr om t he dir ect effor t s of t he individual, such as w ages, salar ies, commissions, et c Passive income income fr om passive act ivit ies, such as limit ed par t ner ships and r ent al r eal est at e Por t folio income income fr om st ocks, bonds, annuit ies, r oyalt ies, dividends, i nt er est et c
Material participation is the involvement of a taxpayer in the operations of an activity on a regular, continuous, and substantial basis. The determination of material participation is important because it may establish whether an activity will be characterized as a passive activity or a nonpassive activity. There are seven tests for material participation. Satisfaction of any one qualifies as material participation: 1. Taxpayer participates more than 500 hours per year. 2. Taxpayers participation is substantially all of the work done in the activity. 3. Taxpayer participates more than 100 hours per year and not less than any other person, including non-owners. 4. Taxpayer participates more than 100 hours per year in each of several activities, totaling more than 500 hours per year in all such activities. Taxpayer 5. materially participated in the activity for five of any of the last ten prior tax years. 6. If the activity is a personal service activity, taxpayer material participates in any three prior years. 7. Based on all facts and circumstances, the taxpayer participates in the activity on a regular, continuous, and substantial basis during the tax year.
Because Mary Beth does not meet the criteria of (1) devoting more than half of her time to the rental activity as a material participant and (2) participating in the rental activity for more than 750 hours, the loss will be treated as passive. She may deduct the loss only against passive income. If Mary Beth had qualified as an active participant (i.e., made management decisions regarding rental fees, etc.), she might have been able to deduct up to $25,000 of the loss against nonpassive income.
a. $600. Ordinary income property given to a charity is limited to basis. b. $7,000. When long-term capital gain property is given to private charities, the fair market value is used. c. $6,000. Since the asset is to be sold, it has unrelated use and the fair market value must be reduced by the gain.