A passive activity is one in which a taxpayer takes no active role. An active role is being taken when there is activity on a regular, continuous and substantial basis. According to the IRS, there are two types of passive activity, which are:
- Business activities
- Rental activities
A taxpayer can only offset a passive loss against income generated from passive activities. If there is an excess passive activity loss, it can be carried forward to a later year until there is passive income against which it can be offset.