What is a passive activity?

In simple terms, a passive activity is a business activity you're a part of, but didn't have significant involvement in. The IRS has specific rules to determine if you have significant involvement, and they refer to it as material participation. If you do NOT materially participate in a business activity as defined by the IRS, then it's considered passive.

Most rental income is considered passive, although there's an exception for real estate professionals allowing their rental income to be considered nonpassive.