EXAM 3 - CHAPTER 9 - PASSIVE ACTIVITY
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The passive activity rules apply to correct answers
• Individuals
• Estates
• Trusts (other than grantor trusts)
• Personal service corporations
• Closely held corporations (more than 50% of the stock is owned by 5
or fewer individuals) - However, for a closely held C corporation, passive
losses can offset active business income, but not portfolio income.
Grantor Trust correct answers
income taxed to creator of the trust, the trust is not treated as a taxable
entity
Personal or Professional Service Corporations correct answers
doctors, lawyers, CPAs, engineers
Who is the primary focus of passive activity rules? correct answers
Individuals
Two kinds of passive activities correct answers
• Trade or business activities in which the TP doesn't materially
participate during the year.
, EXAM 3 - CHAPTER 9 - PASSIVE ACTIVITY
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• Rental activities, even if the TP does materially participate in them,
unless the TP is a real estate professional.
General Rule for Passive Losses correct answers
the excess passive activity loss (passive losses in excess of passive
income) for the tax year isn't allowed;
that is, passive activity losses can only be deducted against passive
income.
However, there is a special allowance (see below) under which some or
all of the TP's passive activity loss may be allowed.
Exception #1 to General Rule for Passive Losses ($25,000 Special
Allowance) correct answers
Taxpayers actively participating in rental real estate activities with AGIs
not in excess of $100,000 may deduct $25,000 of such rental real estate
losses against portfolio and active income.
(Note: The $25,000 amount is reduced by 50% of every dollar of AGI
over $100,000. Thus, the $25,000 amount is totally phased-out at AGI
of $150,000).
Exception #2 to General Rule for Passive Losses correct answers
RULES ALL ANSWERS 100% CORRECT VERIFIED
LATEST DOWNLOADED 2025/2026 BEST
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The passive activity rules apply to correct answers
• Individuals
• Estates
• Trusts (other than grantor trusts)
• Personal service corporations
• Closely held corporations (more than 50% of the stock is owned by 5
or fewer individuals) - However, for a closely held C corporation, passive
losses can offset active business income, but not portfolio income.
Grantor Trust correct answers
income taxed to creator of the trust, the trust is not treated as a taxable
entity
Personal or Professional Service Corporations correct answers
doctors, lawyers, CPAs, engineers
Who is the primary focus of passive activity rules? correct answers
Individuals
Two kinds of passive activities correct answers
• Trade or business activities in which the TP doesn't materially
participate during the year.
, EXAM 3 - CHAPTER 9 - PASSIVE ACTIVITY
RULES ALL ANSWERS 100% CORRECT VERIFIED
LATEST DOWNLOADED 2025/2026 BEST
GRADED A+ FOR SUCCESS
• Rental activities, even if the TP does materially participate in them,
unless the TP is a real estate professional.
General Rule for Passive Losses correct answers
the excess passive activity loss (passive losses in excess of passive
income) for the tax year isn't allowed;
that is, passive activity losses can only be deducted against passive
income.
However, there is a special allowance (see below) under which some or
all of the TP's passive activity loss may be allowed.
Exception #1 to General Rule for Passive Losses ($25,000 Special
Allowance) correct answers
Taxpayers actively participating in rental real estate activities with AGIs
not in excess of $100,000 may deduct $25,000 of such rental real estate
losses against portfolio and active income.
(Note: The $25,000 amount is reduced by 50% of every dollar of AGI
over $100,000. Thus, the $25,000 amount is totally phased-out at AGI
of $150,000).
Exception #2 to General Rule for Passive Losses correct answers
