passive vs non passive

[gman]

Family members buy farm and form LLC. They rent out the land and file a form 1065. I show the loss as passive. I have one member tell me that some of them go out there and shred and also perform some repair and maintenance work. Is that enough to change it to Non passive?

thanks

[MilTaxEA]

If I remember correctly, the work the owner does that would typically be done by an employee (i.e., the owner does not *need* to do it) does not count towards the material participation hours.

[ddoshan]

I think active participation and material participation are two different things.

[MilTaxEA]

I think active participation and material participation are two different things.

Correct. In order to change the character of income from passive to non-passive, you have to materially participate. Active participation is the test to determine if passive income can be used to offset non-passive income (up to $25K loss can be taken if AGI is below $100K).

Edit: The Passive Activity Loss Audit Technique Guide provides an excellent summary of active/material participation and real-estate professionals.