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Passive activity and at-risk limits

TCP Chapter 2 · Area I · Blueprint I.B

A loss reported on a K-1 or a rental schedule is not automatically a deduction. It must pass basis, then the at-risk rules, then the passive activity rules, and only then the excess business loss limit. REG introduced the gates; TCP asks you to work them on real schedules: what counts as at risk, the seven material participation tests, the rental rules and the real estate professional, netting passive income and losses across activities, and what happens to suspended losses when an activity is sold, given away or inherited. The chapter ends with the Blueprint's analysis task: reviewing a basis schedule and splitting a loss between at-risk suspended, passive suspended and allowed. Tessa and Leo work with Sofia Marin, an investor, and Grant and Ava Holloway, who own rentals. Figures are for tax year 2026.

In this chapter

1. What counts as at risk
2. At-risk carryovers and recapture
3. Passive activities and the seven material participation tests
4. Rental activities and real estate professionals
5. Netting passive income and losses
6. Disposing of a passive activity
7. The full order of limits and reviewing a basis schedule

This chapter has 7 lessons, 50 practice MCQs with explanations and 20 simulations, plus flashcards and a recall sheet.

What this chapter covers

• At-risk amounts and qualified nonrecourse financing
• the seven material participation tests
• passive netting
• the $25,000 rental allowance
• real estate professionals
• suspended losses on disposition
• reviewing basis schedules

Chapter 1: Individual compliance and planning · Chapter 3: Gift tax compliance and planning