Which is required for active participation in a rental real estate activity?

Owning at least 10% of the property and making management decisions such as approving tenants or setting rents

Being a real estate professional

Personally performing all repairs

Working at least 500 hours in the activity during the year and personally performing day-to-day management tasks

To qualify as a real estate professional, a taxpayer must perform more than half of personal services in real property trades or businesses in which she materially participates and:

More than 750 hours of services in those real property trades or businesses

At least 500 hours of services in rental activities in which she actively participates

At least 1,000 hours in any business

What happens to suspended passive losses when a taxpayer sells her entire interest in a passive activity to an unrelated party in a fully taxable transaction?

The suspended losses are freed up and deductible in full

They become capital losses deductible against the gain on the sale

A rental with an average customer stay of 7 days or less (such as a short-term vacation rental) is treated how for passive activity purposes?

It is not a rental activity; it is passive unless the owner materially participates

It qualifies for the $25,000 active participation allowance automatically for any owner

Which is one of the seven tests for material participation?

The individual participates more than 500 hours during the year

The individual has invested more than $10,000

The individual is a general partner

The individual owns more than 50% of the activity for the entire year

Passive activity losses and rental property

Q: How much rental loss can I deduct?

Up to $25,000 if you actively participate and your MAGI is $100,000 or less, phasing out completely at $150,000.

Q: What frees suspended passive losses?

A fully taxable disposition of your entire interest to an unrelated party.

Passive losses (from rentals and businesses you do not materially participate in) can offset only passive income, except that active participants in rental real estate can deduct up to $25,000, phased out between $100,000 and $150,000 of MAGI; suspended losses are freed when you sell the whole activity.

Updated 2026-09-23 · 4 sources · By the EnrolledAgentKit team

Exam part

Part 2

Businesses

IRS domain

Specialized Returns and Taxpayers

18 of 85 scored Qs

Tax year tested

2025

2026-27 SEE

Practice questions

10 free below

The rules the exam tests

Figures for tax year 2025, the year the 2026-27 SEE tests. Verify against the cited primary source.
Rule	What it says (2025)	Source
Passive activities	Rentals (generally) and businesses without material participation	IRC 469(c)
$25,000 allowance	Active participation, 10%+ ownership; phase-out 50% of MAGI over $100,000	IRC 469(i)
MFS	Lived together: no allowance; apart all year: $12,500 (phase-out $50,000-$75,000)	IRC 469(i)(5)
Real estate professional	>50% of services and >750 hours in real property trades; material participation	IRC 469(c)(7)
Material participation	Seven tests, e.g., >500 hours	Treas. Reg. 1.469-5T
Short-term rentals	Average stay <= 7 days: not a rental activity	Treas. Reg. 1.469-1T(e)(3)
Disposition	Fully taxable sale of entire interest to unrelated party frees losses	IRC 469(g)
Vacation home	Personal use > greater of 14 days or 10% of rental days: expenses limited to rent; < 15 rental days: nothing reported	IRC 280A
Form	Form 8582	IRS

Worked example

Facts: Single, MAGI $120,000, actively manages a rental with a $30,000 loss; no passive income.

Allowance: $25,000 - 50% x ($120,000 - $100,000) = $15,000 deductible. The other $15,000 is suspended and carried forward until she has passive income or sells the property.

Exam traps

Active participation (management decisions) is easier than material participation.
At MAGI of $150,000 or more, the allowance is zero.
Self-rental net income to a business you materially participate in is recharacterized as nonpassive.
Personal days include rentals to relatives below fair rent.