Active participation is the standard an individual has to meet before a rental real estate loss can be used against nonpassive income under the special allowance in the passive activity rules. It is a management test rather than an hours test, and it sits below the material participation standard that governs the rest of those rules: active participation is not the same as material participation, and it is a less stringent standard than material participation (IRS, Publication 925, Passive Activity and At-Risk Rules).
The phrase also carries an unrelated meaning in education, where it describes classroom engagement strategies. That sense has nothing to do with the tax test and is not what a return preparer is being asked about.
What Counts as Participation
The test asks whether real decisions are being made, not how many hours went into them. A taxpayer may be treated as actively participating if they make management decisions in a significant and bona fide sense, and management decisions that count include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions (IRS, Publication 925).
Two things follow from that wording. Using a property manager does not automatically fail the test, because approving the manager’s recommendations is itself a management decision. And doing a great deal of physical work on a property does not automatically pass it, because the decisions listed are all economic rather than operational.
The Ownership Floor Underneath It
Making decisions is not enough on its own. A taxpayer is not treated as actively participating in a rental real estate activity unless their interest in the activity, including their spouse’s interest, was at least 10% by value of all interests in the activity throughout the year (IRS, Publication 925).
Throughout the year is the part that catches people. An interest acquired mid-year, or diluted below the floor at any point, fails for the whole year rather than for the months it fell short.
One class is excluded almost entirely. Except as provided in regulations, limited partners are not treated as actively participating in a partnership’s rental real estate activities (IRS, Publication 925), so a limited partnership interest generally cannot support the allowance however involved the partner is.
Who Is Eligible to Meet It
Only individuals can actively participate in rental real estate activities (IRS, Publication 925). A corporation cannot, and neither can a partnership in its own right.
Two estate cases are carved out. A decedent’s estate is treated as actively participating for its tax years ending less than 2 years after the decedent’s death, if the decedent would have satisfied the active participation requirement for the activity for the tax year the decedent died. A decedent’s qualified revocable trust can also be treated as actively participating if both the trustee and the executor, if any, of the estate choose to treat the trust as part of the estate, and that choice is irrevocable and cannot be made later than the due date for the estate’s first income tax return including any extensions (IRS, Publication 925).
What Meeting It Unlocks
The special allowance, and only up to a ceiling that shrinks as income rises. The maximum is $25,000, or $12,500 for married individuals filing separate returns and living apart at all times during the year, and it is reduced by 50% of the amount of modified adjusted gross income that is more than $100,000, or $50,000 if married filing separately. Where modified adjusted gross income is $150,000 or more, or $75,000 or more if married filing separately, the allowance is generally unavailable, because it has been reduced to zero (IRS, Publication 925).
Modified adjusted gross income for this purpose is a purpose-built figure rather than the one on the return. It is adjusted gross income computed without taxable social security and Tier 1 railroad retirement benefits, deductible contributions to individual retirement accounts and section 501(c)(18) pension plans, the exclusion for interest on qualified US savings bonds used for higher education, the exclusion for employer adoption assistance, passive activity income or loss included on Form 8582, any rental real estate loss allowed because of real estate professional status, the deductible part of self-employment tax, foreign-derived intangible income and global intangible low-taxed income, and the student loan interest deduction (IRS, Publication 925). How the general version of that figure is built is in modified adjusted gross income.
A Worked Example
The IRS runs its own case for 2025, and it shows the phaseout doing the work rather than the participation test.
Unmarried, not a real estate professional
Salary 120,000
Loss from rental real estate, actively participated 31,000
Modified adjusted gross income 120,000
MAGI over the 100,000 threshold 20,000
Multiply by 50% x 50%
Required reduction to the special allowance 10,000
Maximum special allowance 25,000
Less required reduction (10,000)
Adjusted special allowance 15,000
Deductible in 2025 15,000
Carried over to 2026 16,000Those figures and the result are stated in IRS, Publication 925. The taxpayer passed the participation test in full and still lost more than half the loss to income level alone, which is the usual outcome and the reason the test is rarely the binding constraint for a higher earner.
Where the Test Does Not Apply
It is easy to over-apply. Active participation is not required to take the low-income housing credit or the rehabilitation credit from rental real estate activities (IRS, Publication 925), so a taxpayer who fails the test can still be entitled to those credits.
Common Questions
Active participation is a lower bar, and the two do different jobs. Active participation is a less stringent standard than material participation (IRS, Publication 925), and it only ever opens the special allowance for rental real estate. Material participation is what takes a trade or business out of the passive category altogether. A taxpayer can easily meet the first and fail the second on the same property.
Not in the ordinary case, because only individuals can actively participate in rental real estate activities (IRS, Publication 925). The exceptions are narrow and both concern death: a decedent’s estate for a limited window, and a decedent’s qualified revocable trust where the trustee and executor elect to treat it as part of the estate.
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