Which criterion must be met for an activity to be classified as non-passive?

For an activity to be classified as non-passive, material participation in the business is a critical criterion. Material participation refers to the level of involvement an individual has in the operations of a business activity. The IRS defines specific tests to determine if a taxpayer materially participates in an activity, including factors such as the number of hours worked, the regularity of the activity, and whether the individual is involved in significant decision-making.

When a taxpayer materially participates, the income or loss from that activity is treated as non-passive, allowing the taxpayer to offset it against other non-passive income. This distinction is significant for tax purposes, as passive activities are generally subject to different treatment under IRS regulations, particularly concerning the deductibility of losses.

The other options relate to passive income or involvement but do not provide the requisite involvement level to meet the non-passive classification. For instance, generating rental income may be passive, involvement for less than 750 hours is indicative of a lack of material participation, and spending less than 50% of the time in real estate does not fulfill the conditions for active participation in a business.