Are limited partners passive?

The general rule

The material participation rules in Publication 925 contain a special paragraph for limited partners. If you owned an activity as a limited partner, you generally are not treated as materially participating in it. That sounds absolute, but the publication immediately narrows it: you are treated as materially participating if you met test 1, test 5 or test 6 for the tax year. Those are the objective tests, and they are the only way out. The reasoning built into the structure is that limited partners are investors who by definition do not run the business, so only a clear, quantifiable level of involvement counts.

The three tests that still work

• Test 1: you participated in the activity for more than 500 hours during the year.
• Test 5: you materially participated, under any test other than test 5 itself, in any 5 of the 10 immediately preceding tax years.
• Test 6: the activity is a personal service activity (health including veterinary, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or another business in which capital is not a material income-producing factor) and you materially participated in it for any 3 preceding years.

Notice what is missing. The 100-hour comparison test (test 3), the substantially-all test (test 2), the significant participation test (test 4), and the facts-and-circumstances test (test 7) are not available to a limited partner. A limited partner who works 400 hours and is the most active person in the business still does not materially participate.

When you are not a limited partner for this purpose

You are not treated as a limited partner if you were also a general partner in the partnership at all times during the partnership's tax year ending with or within your tax year, or, if shorter, during that part of the year in which you directly or indirectly owned your limited partner interest. A person holding both kinds of interest for the whole period is tested under all seven tests like anyone else. Holding the general interest for only part of the year does not remove the limitation for the rest.

Why the label matters in other places

The same word triggers other limits in the publication, so a limited partnership interest can matter even if you do meet a test:

• Active participation in rental real estate: except as provided in regulations, limited partners are not treated as actively participating in a partnership's rental real estate activities, so the special $25,000 allowance is generally unavailable to them for that interest.
• Grouping: a limited partner or limited entrepreneur in a film or video tape activity, farming, section 1245 property leasing, oil and gas, or geothermal activity may not group that activity with an activity in another type of business.
• At-risk rules: the at-risk limit applies to partners individually and sits between the basis limit and the passive limit in the order that applies to their share of a loss.

What is passive and what is not for a limited partner

Being passive under these rules does not change the character of the income. A limited partner who is passive can use losses from the partnership only against passive income, including income from other passive activities, with the rest carried forward. Portfolio items such as interest, dividends and royalties allocated by the partnership are not passive activity income, so they cannot be reduced by passive losses. The publication also warns that if you have net income from rental of nondepreciable property or from certain other activities, it can be recharacterized as nonpassive. When the partnership holds a publicly traded partnership interest, the PTP rule keeps its income and losses separate.

A worked example

Dana is a limited partner in a veterinary clinic partnership. In 2025 Dana helped with scheduling for 300 hours, which does not meet test 1. Earlier, as a general partner, Dana materially participated in the clinic in 4 of the last 10 years. Test 5 needs 5 of 10, so it fails. Test 6 needs only 3 prior years of material participation in a personal service activity, and veterinary services are listed as one, so it is met. Dana is treated as materially participating and the clinic is not passive for Dana in 2025. Change the facts so Dana never materially participated in earlier years and the activity is passive. The checker above encodes those same steps. The names and numbers are invented to demonstrate the rules.

Check the Schedule K-1

A limited partner usually receives a Schedule K-1 (Form 1065) from the partnership. If you believe you meet test 1, 5 or 6, you need your own record of hours and prior-year participation, because the proof of participation rules apply to you. Anything that is passive goes through Form 8582, and the loss is limited to passive income plus any allowed special allowance.

Sources

• IRS Publication 925, Passive Activity and At-Risk Rules (2025): Material Participation (Material participation tests, Limited partners); Special $25,000 allowance (Active participation); Grouping Your Activities (Certain activities may not be grouped); Loss limits for partners and S corporation shareholders; Passive Activity Income. Read November 2, 2026.

Edition read: Publication 925 (2025), for use in preparing 2025 returns. Dollar limits and dates in this publication are for 2025; check the current publication and form instructions for your tax year. This page summarizes the publication and does not replace it.