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John is material participant in the ownership of an apartment building and also owns a computer consulting business. He spends a total of 2,000 hours during the year on these activities. John spends 53% of the time operating the apartment building and the remainder of his time is spent in the computer consulting business.

a. The computer consulting business is a passive activity but the apartment building is not.
b. The apartment building is a passive activity but the computer consulting business is not.
c. Both the apartment building and the computer consulting business are passive activities.
d. Neither the apartment building nor the computer consulting business is a passive activity.

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Answer:

(d). Neither the apartment building nor the computer consulting business is a passive activity.

Explanation:

According to the Internal Revenue Service (IRS), a passive activity is a business venture in which an individual does not continuously participate and invest materials in, over the course of a year.

If a person participates in a business activity for over 500 hours in a year, then he or she can be said to have participated materially.

Since John spent 53% (1060 hours) operating the apartment building and the remaining 47% (940 hours) on the computer consulting business, neither of these businesses are considered to be passive activities.

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