For purposes of the seven material participation tests listed later, participation generally in-cludes any work you did in connection with an activity if you owned an interest in the activity at the time you did the work. The capacity in which you did the work does not matter. However, work is not treated as participation if it is work that an owner would not customarily do in the same type of activity and one of your main reasons for doing the work was to avoid the disallowance of losses or credits from the activity under the passive activity rules.
Work you did as an investor in an ac-tivity is not treated as participation un-less you were directly involved in the day-to-day management or operations of the activity. Work done as an investor includes:
Studying and reviewing financial statements or reports on the activity,
Preparing or compiling summaries or analyses of the finances or operations of the activity for your own use, and
Monitoring the finances or opera-tions of the activity in a nonmanagerial capacity.
Participation by your spouse during the tax year in an activity you own can be counted as your participation in the activity. This rule applies even if your spouse did not own an interest in the ac-tivity and whether or not you and your spouse file a joint return. However, this rule does not apply for purposes of de-termining whether you and your spouse can elect to have your business treated as a qualified joint venture instead of a partnership (see Qualified Joint Venture, earlier).
For purposes of the passive activity rules, you materially participated in the operation of this trade or business activi-ty during 2014 if you met any of the fol-lowing seven tests.
You participated in the activity for more than 500 hours during the tax year.
Your participation in the activity for the tax year was substantially all of the participation in the activity of all in-dividuals (including individuals who did not own any interest in the activity) for the tax year.
You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other person for the tax year. This includes individuals who did not own any interest in the activity.
The activity is a significant par-ticipation activity for the tax year, and you participated in all significant partici-pation activities for more than 500 hours during the year. An activity is a "signifi-cant participation activity" if it involves the conduct of a trade or business, you participated in the activity for more than 100 hours during the tax year, and you did not materially participate under any of the material participation tests (other than this test 4).
You materially participated in the activity for any 5 of the prior 10 tax years.
The activity is a personal service activity in which you materially partici-pated for any 3 prior tax years. A per-sonal service activity is an activity that involves performing personal services in the fields of health, law, engineering, ar-chitecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital is not a material income-producing factor.
Based on all the facts and circum-stances, you participated in the activity on a regular, continuous, and substantial basis for more than 100 hours during the tax year.Your participation in managing the activity does not count in determin-ing if you meet this test if any person (except you) (a) received compensation for performing management services in connection with the activity, or (b) spent more hours during the tax year than you spent performing management services in connection with the activity (regard-less of whether the person was compen-sated for the services).
Rental of property. Generally, a rental activity (such as long-term equipment leasing or rental real estate) is a passive activity even if you materially participa-ted in the activity. However, if you ma-terially participated in a rental real estate activity as a real estate professional, it is not a passive activity. Also, if you met any of the five exceptions listed under Rental Activities in the Instructions for Form 8582, the rental of the property is not treated as a rental activity and the material participation rules explained earlier apply. See Activities That Are Not Passive Activities in the Instructions for Form 8582 for the definition of a real estate professional.
Exception for oil and gas. If you are filing Schedule C to report income and deductions from an oil or gas well in which you own a working interest di-rectly or through an entity that does not limit your liability, check the "Yes" box. The activity of owning a working inter-est is not a passive activity, regardless of your participation.
Limit on losses. Your loss may be limi-ted if you checked the "No" box on line G. In this case, you may have a loss from a passive activity, and you may have to use Form 8582 to figure your al-lowable loss, if any, to enter on Sched-ule C, line 31.
You can deduct losses from passive activities in most cases only to the ex-tent of income from passive activities. For details, see Pub. 925.