Passive Activity LossesTax Shelters – popular pre – 1986Small investment generated lots of deductionsTypes on income  Active, Passive, Portfolio losses from business ventures limited: in this order1) BasesS corps & corps – initial investment + contributions – distributions + for S corps NI/Loss allocatedPartnerships = initial investment + contributions – distributions + liabilities allocated (incl. Non re + Net Income/ less allocations 2) At-RiskS corps + p ships – rules apply at owner levelS corps = Initial investment + contributions- distribution + Net income /Loss + borrowings made by owner for activity & has perks. ? Partnerships = initial investment + contributions- distribution+ NI/Loss + liability alloc = recourse & qualified non-rec. If at risk goes below zero then income recapture.3) Passive Activity Loss- Losses limited to passive income- If property is sold all losses are deductible- If losses are limited they are carried forwardPassive activity  1. Trade or Business in which total profits does not materially participate.2. or all rental activitiesactivity grouping rulesMaterial participation – 7 tests1. Individual participants in activity for >500 hours during the year2. Individual’s participation constitutes substantially all of the part. In the activity of all individuals3. Individual participants > 100 hours 1 year and participates. Is not less than any other individual.4. Activity is a significant participation activity and aggregate participation in all sign. Part activities > 500 hours / yearSignificant participation activity  individual participates > 100 hours in one activity.5. Material participation for any 5 out of the last 10 tax years.6. Activity is a personal service activity and individual materially participated in activity for any 3 prior tax years7. Facts & circumstances – individual participation in activity on a regular, continuous and substantial basis during the year.- Loss for activity w/material participation – no limit- If no material participation, the loss is limited to passive income from other entities.Rental activity  activity where payment received for use of tangible (real/personal) property- Six exceptions that make activity subject to material participation1. Any period of customer use is 7 days or less2. Any period of customer use is 30 days or less and property provides significant personal services3. Owner of property provides extraordinary/ personal services – customers use of property is incidental to receipt of services (e.g. dormitory or hospital bed04. Rental is treated as incidental to a non rental activity5. Taxpayer customarily makes property available during defined business hours for non exclusive usedby various customers (e.g. golf course)6. Property is proved for use in an activity conducted by a Pship, S corp or joint venture in which taxpayer owns an interestIf rental  all passive If not rental  subject to material participation standard next to determine if passive or active Rental Exceptions:1. Losses not passive for real estate professionalsa. > ½ personal services are in the real property t/b in which tax payers material participationb. Taxpayers performs > 750 hours on t/b without marital participation2. Any individual can deduct up to $25,00 of real estate losses against active income phase out if AGI > $100,000- $150,000 (MFJ) taxpayer must:a. Actively participateb. Own > 10% in value of all interest for the entire tax year.Active participation = taxpayer participates in making management decisions but participation does not have to be regular, continuous or