Passive Activities

[Gretel]

Snags post, from which I learned a lot, brought up the general confusion I always end up in dealing with passive activities. I am fine with simple scenarios, but..

Do I have this right:

1. Each passive activity first has to pass the At-Risk test if loss. (If LLC then liabilities qualify only if recourse debt, right?)
2. If they are all pass this test, then they end up in the bucket of all passive activities. If sum is loss, loss is allowed only if they actively participate in all of them (of course $25,000 and income limit)
3. If active participation in only some of them, how do you pick and choose?

[JG EA]

Snags post, from which I learned a lot, brought up the general confusion I always end up in dealing with passive activities. I am fine with simple scenarios, but..

Do I have this right:

1. Each passive activity first has to pass the At-Risk test if loss. (If LLC then liabilities qualify only if recourse debt, right?)
2. If they are all pass this test, then they end up in the bucket of all passive activities. If sum is loss, loss is allowed only if they actively participate in all of them (of course $25,000 and income limit)
3. If active participation in only some of them, how do you pick and choose?

Pick and choose from different activities like K-1's? If so, then each would stand on its own. You could be an active partner in a partnership and a passive invester in an S-Corp. I'm sure you've read TTB7-9.
But as far as losses go all of your active investments - losses can be taken if enough basis and at risk. Losses for passive activities can only be taken if there are enough gains to cover (and if enough basis and if at risk). If there are losses and no gains they are carried over, sometimes until the thing is sold.

[JG EA]

Let me try to put this better. I even couldn't understand my own post.
I think of At Risk rules last. So the first thing I think of is passive or MATERIAL participation. (I call it active but it is really non-passive or material participation, so I am going to stop calling it active.)

It might be helpful to think of the form it goes on. If it flows to form 8582 it is passive activity or Active rental property. (Active participation in rental property means making decisions, etc and not material participation or non-passive. Rental property is always passive unless one is a RE Professional.)

Then there is the opposite of passive activity category. Non passive. Does not flow to an 8582. Stands alone.

So, if passive activities have a gain that’s easy. If they have a loss, then can they take the loss? What reasons could they not take the loss? Basis and At Risk.

Material participation gains are easy. Material participation losses can be taken if they have enough basis and are at risk.

Where I get hung up is when there are losses and they are carried over and retain their position on the carry over. I’ve had them this year where the loss for material participation in an S-Corp losses had to be carried over only for the reason that the 2 shareholders in a service took too much payroll! Everything is prorated. Contributions even. I don’t have a good system for this. My S-Corp software has a good basis tracking and that is sort of all I need.

But what about other clients that just get K-1’s, Are they passive investors or material participants? I don’t know. They don’t know. But if the activity has line 2, rental then that is passive for sure. Then we have to basically print out the material participation rules and ask the client (or client takes this to the employer's accountant and get our answer as to what they are. Passive or MP's.

[Gretel]

Thanks, JG. I read your first post 3 times before thinking I kind of understand and then laughed when I started to read your 2nd post.

It's a tough issue. At this point I was not even concerned about MP since all K-1's from this client come from rental activities. I also think I asked a stupid question about active participation. You are right, either a rental activity is with active participation or it is not. If it is and income limits don't apply, they can be taken up to $25,000. Seems to be simple now.