What is a recharacterization of rental activities?

Usually, income from rental activities is considered passive income. However, in some situations, recharacterization rules apply to your rental activities, which make the income nonpassive (any losses remain passive). Whether income is passive or nonpassive affects how it is taxed and when losses are allowed.

These are a few situations that require recharacterization:

• The rental is primarily land (rather than buildings or other depreciable man-made items). This applies when 70% or more of the unadjusted basis of the property is land or other non-depreciable property.
• The rental income comes from renting to a business you materially participate in (also known as Self-Rental). This applies when you rent to a business you own or a business you are employed by.

There are other rare scenarios that may also require recharacterization. For more information, see Publication 925 .