8697 / What is a passive activity for purposes of the passive loss rules?

A passive activity is any activity that involves the conduct of a trade or business in which the taxpayer does not “materially participate,” (see Q 8698) or is a rental activity, without regard to whether or to what extent the taxpayer participates in such activity.¹

The IRC provides that regulations may define the term “trade or business” to include activities undertaken in connection with a trade or business or activities that are engaged in for the production of income under IRC Section 212.

The regulations provide that the IRS will treat real property held for the production of income under IRC Section 212 as a trade or business for purposes of the rental real estate with material participation exception (see Q 8700).