What is "passive activity"?

Q: I own a summer rental in Maine, that I have primarily for rental income. I do not use the property for more than 14 days per year. I am confused about what is meant by "passive activity" and how it pertains to rental property. Can you please explain the "passive activity" rule to me? Thank you. - Maria

The following answer was provided by Mark Misselbeck, CPA, Levine Katz Nannis & Solomon PC, Needham.

A: Passive Activity is generally any activity that is not a Material Participation Activity. Rental of Real Estate or other property is Passive, unless it involves the provision of extraordinary services or is for extremely short-term rental (less than 7 days, on average, such as would be the case for a motel or hotel). A Material Activity is something you do to earn your living, either by the "sweat of your brow or the sweat off your back." There is a limited exception for Active involvement in the management of Rental Real Estate. A loss of as much as $ 25, 000/year may be claimed, provided your Adjusted Gross Income, before taking any of the loss from the rental property into account, is no more than $ 100,000 (a partial loss is allowed between $ 100,000 and $ 150,000). IF your liability for losses from an activity is limited, the activity is generally going to be a Passive Activity, absent very unusual circumstances.