There are two kinds of passive activities: trade or business activities in which the taxpayer does not materially participate during the year; and rental activities, even if the taxpayer does not materially participate in them, unless the taxpayer is a real estate professional. Many taxpayers have heard the term “passive activity” in relation to a rental activity and wondered exactly what it means.

An activity is a rental activity if real or personal tangible property is used or held for use by a taxpayer and gross income or expected gross income from the activity represents amounts paid or to be paid primarily for the property’s use, whether pursuant to a lease, service contract, or other agreement.