Table of Contents
CHAPTER 1 Overview1-1
| General Limitation Provision | 1-1 |
| Prior Law | 1-1 |
| Reasons for Change | 1-1 |
| Passive Loss Rules | 1-5 |
| Application | 1-7 |
| Calculating Passive Loss | 1-7 |
| Categories of Income & Loss | 1-9 |
| Suspension of Disallowed Losses | 1-14 |
| Taxpayers Affected | 1-25 |
| Date of Enactment Phase-In (Some Ancient History) | 1-29 |
CHAPTER 2 Material Participation2-1
| General Rule | 2-1 |
| "Trade or Business" Definition | 2-1 |
| Material Participation Standards | 2-1 |
| Committee Report Guidelines | 2-2 |
| Regulations | 2-7 |
| Special Rules for Entities | 2-19 |
CHAPTER 3 Activity Definition3-1
| History & Rationale | 3-1 |
| Tax Reform Act of 1986 | 3-1 |
| Old Temporary Activity Regulations - A Bad Start | 3-3 |
| A Change in Direction from Legislative History | 3-4 |
| Undertakings | 3-5 |
| Aggregation of Trade or Business Undertakings | 3-13 |
| Integrated Businesses | 3-18 |
| Aggregation of Professional Service Undertakings | 3-19 |
| Control by the Same Interests | 3-21 |
| Rental Real Property Undertakings | 3-22 |
| Elective Treatment of Undertakings Other Than Rental Real Estate | 3-25 |
| Participation Unaffected | 3-25 |
| Miscellaneous Entity Rules | 3-27 |
| Effective Date | 3-27 |
| Final Simplified Activity Regulations | 3-28 |
| Facts & Circumstances Test | 3-28 |
| Consistency | 3-32 |
| Regrouping | 3-34 |
| Partial Dispositions | 3-34 |
| Passive Activity Audit Guide | 3-35 |
| Indicators of Potential Passive Activity Loss Issues | 3-35 |
| Investment Interest | 3-36 |
| Material Participation | 3-36 |
| Significant Participation Activities | 3-36 |
| Active Participation | 3-37 |
| Net Lease Properties | 3-37 |
| Vacation Rentals | 3-37 |
| Self-Charged Expenses | 3-38 |
| Rental & Nonrental Activity Grouping | 3-38 |
| Divorce | 3-38 |
CHAPTER 4 Passive & Nonpassive Activities4-1
| Trade or Business | 4-1 |
| Rental Activity | 4-2 |
| Exceptions to Passive Activity Status | 4-8 |
| Non-Passive Activities | 4-11 |
| Working Interests in Oil & Gas | 4-11 |
| Activities within Activities | 4-15 |
CHAPTER 5 Passive Activity Loss5-1
| Passive Activity Loss | 5-1 |
| Husband & Wife | 5-1 |
| Special Rule for Closely Held Corporations | 5-2 |
| Affiliated Groups Filing Consolidated Returns | 5-3 |
| Carryover of Disallowed Losses | 5-3 |
| Treatment of Carryover Losses | 5-3 |
| Allocation Process | 5-3 |
| Significant Participation Activities | 5-4 |
| Separate Identification of Deductions | 5-5 |
CHAPTER 6 Passive Activity Gross Income6-1
| Definition | 6-1 |
| Income from Dispositions of Property Used in Passive Activities | 6-1 |
| Mixed Use of Property | 6-2 |
| Alternating Use | 6-3 |
| Disposition of Appreciated Property Formerly Used in a Nonpassive Activity | 6-4 |
| Installment Sales | 6-5 |
| Rental Activities | 6-5 |
| Special Rule for Rental Real Estate | 6-5 |
| Dealers | 6-10 |
| Net Leases | 6-10 |
| Income From §481 Adjustment | 6-13 |
| Self-Charged Interest | 6-13 |
| Passive Nature of Self-Charged Interest | 6-13 |
| Self-Charged Interest Regulations | 6-14 |
| Exclusion of Portfolio Income | 6-14 |
| Publicly Traded Partnerships | 6-16 |
| Exclusion of Personal Service Income | 6-17 |
| Definition of Compensation | 6-18 |
| Exclusion of Oil & Gas Income | 6-19 |
| Continuing Exclusion after Initial Qualification | 6-19 |
| Miscellaneous Exclusions | 6-20 |
| Trade or Business Income | 6-20 |
| Recharacterization of Passive Income | 6-23 |
| Active Business Recharacterization | 6-24 |
| Portfolio Income Recharacterization Rules | 6-27 |
| Limitation on Recharacterization | 6-28 |
CHAPTER 7 Passive Activity Deduction7-1
| Definition | 7-1 |
| Qualified Residence Interest Deduction Exclusion | 7-2 |
| Coordination with Other Deduction Limitations | 7-3 |
| Effect of Coordination | 7-3 |
| Losses on Disposition | 7-4 |
| Negative §481 Adjustment | 7-4 |
| Exceptions | 7-5 |
CHAPTER 8 Passive Activity Credits8-1
| Definition | 8-1 |
| Regular Tax Liability Allocable to Passive Activities | 8-1 |
| Exception for Real Estate Rental Activity Credits | 8-2 |
| Special Definition for Closely Held C Corporations | 8-2 |
| Net Active Income | 8-3 |
| Application | 8-3 |
| Credits Subject to Passive Activity Limits | 8-3 |
| Allocation of Disallowed Credits | 8-4 |
| Separate Identification of Credits | 8-4 |
| Exceptions | 8-4 |
| Ordering of Credit Limitations | 8-5 |
| Special Rule for Partners & S Corporation Shareholders | 8-5 |
| Coordination with Other Limitations | 8-5 |
| Treatment of Carryover Credits | 8-6 |
CHAPTER 9 Items Received From Pass-Through Entities9-1
| Characterization | 9-1 |
| Entity Tax Year | 9-1 |
| Payments to Partners as Outsiders | 9-2 |
| Payments to Partners as Partners | 9-2 |
| Partnership Liquidations - Special Rules | 9-2 |
| Sale or Exchange of Interest | 9-3 |
| Applicable Valuation Date | 9-3 |
| Allocation Process | 9-4 |
| Tiered Pass-through Entities | 9-5 |
| Restriction on Conversion of Nonpassive Income | 9-6 |
CHAPTER 10 Interaction with Other Code Sections10-1
| Application of Passive Loss Rules | 10-1 |
| At-Risk Rules | 10-1 |
| Investment Interest | 10-2 |
| Characterization of Passive Activity Income or Deduction | 10-2 |
| Coordination with Section 1211 | 10-3 |
| Husband & Wife Rules | 10-3 |
| Corporations | 10-3 |
Answers & Explanations10-6
Glossary10-44
Index of Keywords & Phrases10-45
Course Details
Author: Danny Santucci, J.D.
Danny earned his Bachelor of Arts in Political Science from the University of California at Irvine in 1969. He received his Juris Doctorate from Boalt Hall School of Law, University of California at Berkeley in 1972, at which time he began practice as a tax attorney in Southern California.
His legal career was initiated with the business and litigation firm of Edwards, Edwards and Ashton. Later he joined the Century City entertainment firm of Bushkin, Gaims, Gaines & Jonas working for many well-known celebrities. In 1980, Danny established the law firm of Santucci, Potter and Leanders, in Irvine, California. With increasing lecture and writing commitments, Danny went into sole practice in 1995. His practice emphasizes business taxation, real estate law and estate planning.
Danny has been an officer and active member in various organizations including the Glendale Bar Association, Century City Bar Association, Orange County and Los Angeles County Bar Associations, California State Bar Association, Toastmasters and Lions Club. He also avidly supports the American Association for the Advancement of Science. He has been admitted to practice before all California and federal courts including the United States Tax Court and the United States Supreme Court.
Serving as a lecturer for the Continuing Education of the Bar of California, Golden Gate University, and numerous state C.P.A. societies, Danny teaches a variety of tax, business and real estate courses. Danny has been in demand all across the country as a speaker for all levels of professional and civic organizations and numerous major seminar circuits. Danny spoke to over 2,000 people per month and traveled more than 150,000 miles annually.
In 2015, he withdrew from the lecture circuit to devote himself to tax research and writing. The author of numerous texts, he is listed in "Who’s Who in Creative Real Estate" and is admitted to the American Exchangor’s Hall of Fame.
Publication/Revision Date: 10/5/2026
Course Exam Questions (online): 80 (multiple-choice)
Program Delivery Method: Self-Study (NASBA QAS Self-Study)
Available Formats of Course Text: PDF or PDF plus printed copy sent in the mail
Course Level, Prerequisites, and Advance Preparation Requirements
| License | Course Level | Prerequisites | Advance Preparation Requirements |
|---|
| CPA | Overview | None | None |
| EA/OTRP | Overview | None | None |
Sponsor ID Numbers
National Registry of CPE Sponsors ID: 107615
IRS Qualified Sponsor ID: FWWKO — Course ID: FWKKO-T-00804-26-S
State CPA Board Sponsor ID Numbers (where applicable)
Florida Division of Certified Public Accounting: 0004761
Hawaii Board of Public Accountancy: 14003
New York State Board for Public Accountancy: 002146
Ohio Accountancy Board: CPE .51 PSR
Pennsylvania State Board of Accountancy: PX178025
Texas State Board of Public Accountancy: 009349
Learning Objectives
Chapter 1: Overview
Major Topics
- Reasons for change from prior law
- Categories of income & loss
- Fully taxable disposition
- Entire interest
- Other transfers
- Ordering of losses
- Regular & personal service corporations
- Real estate professionals
- Definition of pre-enactment interest
- Increase or decrease in pre-enactment interests
Learning Objectives
As a result of studying the course material, you should be able to meet the objectives listed below:
- Recognize the tax impact of the §469 limitation provision, determine categories of income and loss income and loss into categories, and list Congressional reasons for its passage.
- Specify the aggregate mechanics of the passive loss rules, identify what type of losses remain unaffected, and recognize passive and nonpassive (including portfolio) income sources.
- Identify ways to ultimately "free up" passive losses, specify the treatment of passive credits on disposition, and determine limitations on related party transactions.
- Determine the allowance of suspended losses upon nonrecognition transactions, specify the order of recognized tax attributes upon position, and recognize the allocation of losses from multiple passive activities.
- Identify which taxpayers are or are not subject to the passive loss rules, specify the full-time real estate professional exception, and recall the original §469 phase-in provisions.
After studying the materials in Chapter 1, answer exam questions 1 to 18.
Chapter 2: Material Participation
Major Topics
- General rule
- Definition of "trade or business"
- TRA '86 committee report guidelines
- General rule for individuals
- Record keeping regulations
- Meaning of participation
- Limited partnership interests presumption
- Special rules for trusts & estates
- Special rules for retired & disabled farmers
- Special rules for corporations
Learning Objectives
As a result of studying the course material, you should be able to meet the objectives listed below:
- Identify how to avoid the application of the passive loss rules through material participation, specify tests provided by the initial regulations on material participation and how these tests provide useful §469 categories, determine how to keep appropriate records of participation, identify exceptions to what counts toward material participation, and determine annual material participation.
- Recognize special applications of the material participation rule by recalling its application to trusts, estates, and affiliated group members.
After studying the materials in Chapter 2, answer exam questions 19 to 28.
Chapter 3: Activity Definition
Major Topics
- Tax Reform Act of 1986
- Undertakings of old temporary activity regulations
- Aggregation of trade or business undertakings
- Integrated businesses
Chapter 3
Major Topics
- Aggregation of professional service undertakings
- Control by the same interests
- Rental real property undertakings
- Participation unaffected
- Final simplified activity regulations
- Passive activity audit guide
Learning Objectives
As a result of studying the course material, you should be able to meet the objectives listed below:
- Recognize the history and rationale of the definition of "activity" by specifying the use of analogies under §183 and §465, specify the original activity undertaking rules, and recognize the passage of final simplified activity regulations.
- Determine whether two or more trade or business undertakings could be a single integrated business. Recognize the importance of the passive activity audit guide as a tool to avoid audits by specifying potential audit issues that the passive activity audit guide addresses.
After studying the materials in Chapter 3, answer the exam questions 29 to 39.
Chapter 4: Passive and Non-Passive Activities
Major Topics
- Trade or business
- Rental activity exemptions
- Rental of a dwelling unit
- Trading personal property
- Working interests in oil & gas exemption
- Entities that limit liability
- Disqualified deductions
- Activities within activities
Learning Objectives
As a result of studying the course material, you should be able to meet the objectives listed below:
- Determine a "rental activity" identifying conditions for a rental activity to exist and the resulting passive presumption.
- Recognize exceptions to passive activity status and their tax effect and specify the tax treatment of when activities are "nested" in each other.
After studying the materials in Chapter 4, answer exam questions 40 to 44.
Chapter 5: Passive Activity Loss
Major Topics
- Working interest exception for husband & wife
- Separate accounting of disallowed items for husband & wife
- Net active income of closely held corporations
- Affiliated groups filing consolidated returns
- Treatment of carryover losses
- Allocation process
- Significant participation activities
- Separate identification of deductions
Learning Objectives
As a result of studying the course material, you should be able to meet the objectives listed below:
- Determine what constitutes a "passive activity loss," identify the appropriate passive loss tax treatment of spouses, and recognize an affiliated group's passive activity loss using group member items.
- Specify reasons why disallowed passive activity losses must be allocated among all the taxpayer's activities and determine how to allocate and carry over disallowed passive activity losses.
After studying the materials in Chapter 5, answer the exam questions 45 to 49.
Chapter 6: Passive Activity Gross Income
Major Topics
- Income from dispositions of property used in passive activities
- Disposition of appreciated property formerly used in a nonpassive activity
- Rental activities
- Income from §481 adjustment
- Self-charged interest
Chapter 7: Passive Activity Deduction
Major Topics
- Definition of passive activity deduction
- Qualified residence interest deduction exclusion
- Coordination with other deduction limitations
- Effect of coordination
- Losses on disposition
- Negative §481 adjustment
- Exceptions
Learning Objectives
As a result of studying the course material, you should be able to meet the objectives listed below:
- Determine the source of passive losses and the exclusion of qualified residence interest under §469(j)(7) and specify the coordination of passive activity deductions with other deduction limitations.
- Recognize how to account for losses on disposition according to Reg. §1.469-2T(d)(5), cite instances that require such a loss to be allocated, and determine a negative §481 adjustment.
After studying the materials in Chapter 7, answer exam questions 62 to 67.
Chapter 8: Passive Activity Credits
Major Topics
- Regular tax liability allocable to passive activities
- Exception for real estate rental activity credits
- Net active income
- Credits subject to passive activity limits
- Allocation of disallowed credits
- Separate identification of credits
- Ordering of credit limitations
- Special rule for partners & S corporation shareholders
- Coordination with other limitations
- Treatment of carryover credits
Learning Objectives
As a result of studying the course material, you should be able to meet the objectives listed below:
- Determine "passive activity credits" and their usage under §469 and identify a closely held corporation's passive activity credit net active income for the tax year.
- Specify circumstances where separate identification of credits is required and the order of credit limitations.
After studying the materials in Chapter 8, answer the exam questions 68 to 71.
Chapter 9
Major Topics
- Payments to partners as outsiders
- Payments to partners as partners
- Special rules for partnership liquidations
- Applicable valuation date for sale or exchange of interest
- Gain and loss dispositions
- Basis adjustments
- Aggregation of portfolio assets & default rule
- Tiered pass-through entities
- Restriction on conversion of nonpassive income
Learning Objectives
As a result of studying the course material, you should be able to meet the objectives listed below:
- Identify the tax character of items received from pass-through entities as passive or nonpassive and determine a taxpayer's entity participation.
- Recognize items and events that uniquely adjust or allocate passive losses for pass-through entities and their owners by determining gain or loss from a sale or exchange of an interest.
After studying the materials in Chapter 9, answer the exam questions 72 to 76.
Chapter 10: Interaction with Other Code Sections
Major Topics
- Application of passive loss rules
- At-risk rules
- Investment interest
- Characterization of passive activity income or deduction
- Coordination with §1211
- Husband & wife rules
- Corporations
Learning Objectives
As a result of studying the course material, you should be able to meet the objectives listed below:
- Recognize the application and ordering interaction of §469 with other Code sections by determining how passive activity income or deduction relate to §465 and §1211.
After studying the materials in Chapter 10, answer the exam questions 77 to 80.
