This hits interest, dividends, annuities, royalties, rents, income from a passive trade or business, and realized capital gains other than passive.

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The passive activity loss rules require us to divide our trade or business activities into passive and non-passive buckets.

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The S corporation is non-passive to A, it conducts a trade or business, and is not engaged in trading financial instruments.

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The public is sitting in passive index ETFs now, no need to trade or to have a broker or mutual fund manager buying and selling things on their behalf.

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Also deductible are investment interest, but only to the extent of investment income and trade or business interest (subject to the passive activity loss rules).

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The tracing rule, which has some really complicated regulations, will have you divide your interest expense into trade or business, investment interest, interest associated with passive activities and personal interest.

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Such taxpayers are generally exempted from the 3.8% Medicare Surtax unless their business either (a) is a passive activity with respect to such taxpayer or (b) is a trade or business involved in trading in financial instruments or commodities.

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To the contrary, if the rental activity does not rise to the level of a trade or business, the fact that it is no longer treated as passive courtesy of the real estate professional rules will not change the fact that the rental income is considered net investment income.

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People have a lot of trouble meeting the real estate trade or business exception to the rule that makes real estate rental per se passive.

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