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Changing Activities

Changing from a Passive Activity to an Active Activity

A former passive activity is an activity that is not a passive activity in the current tax year, but was a passive activity in any earlier tax year. If you start materially participating in an activity in which you were previously passive, suspended losses generated when you were passive with respect to a given activity remain suspended. However, the suspended losses from the converted activity may be offset against the income from this activity after you become a material participant. To apply this exception you must be able to show that the income is from the same activity in which you did not previously materially participate. You can offset the allocable part of your current year tax liability with any prior year unallowed passive activity credits from that activity. The allocable part of your current year tax liability refers to that part of this year's tax liability that is allocable to the current year net income from the former passive activity. This is figured after you reduce your net income from a former passive activity by any prior year unallowed loss from that activity (but not below zero).

Significant Participation Passive Activities

A significant participation activity is any trade or business activity in which you participated for more than 100 hours during the tax year but did not materially participate. If your gross income from all significant participation passive activities is more than your deductions from those activities, a part of your net income from each significant participation passive activity is treated as non-passive income.