Section 469 and Transferable Credits: What Individual Buyers Need to Know

Individuals can legally buy transferable credits. Whether the credit does anything for them depends on the passive activity rules. Of every question we hear, this is the one that decides whether a purchase makes sense.

The rule in plain English

The final regulations treat a purchased credit as determined in connection with a trade or business and make it subject to §469 (Treas. Reg. §1.6418-2(f)(3)(ii)). Buying the credit does not give you an ownership interest in, or participation in, the seller's business, so for most individual buyers the credit is a passive activity credit. Under §469, a passive activity credit is allowed only against tax attributable to passive income. §469(d)(2) defines the passive activity credit as the excess of credits from passive activities over the tax attributable to passive activity income.

The IRS FAQ (Q15) puts it plainly: such taxpayers "can only use purchased credits to offset passive income tax liability. Most taxpayers do not have passive income tax liability as it generally does not include tax liability arising from most investment activities."

What counts as passive income

• Generally passive: income from a trade or business in which you do not materially participate, and rental activities (§469(c)). Examples: net rental income, income from limited partnership or private equity K-1 businesses where you are not materially participating.
• Not passive: wages, salary and active business income; portfolio income such as interest, dividends, annuities, royalties and gains on investment property (§469(e)(1)).

So W-2 income cannot be offset, and neither can most dividends, interest or capital gains.

Material participation

Whether you "materially participate" is tested under Temp. Reg. §1.469-5T(a), which lists seven tests. For example: you participate more than 500 hours in the year; your participation is substantially all of the participation; or you materially participated in five of the last ten years. Rental activities are passive unless an exception applies.

How it is computed

The passive activity credit limitation is computed on Form 8582-CR. Disallowed credit carries forward; it is not lost (§469(b)). See carryforward rules. After the §469 limit, the §38(c) limit still applies (details).

The planning question

Estimate the federal tax attributable to your passive income: the difference between your total tax and the tax you would owe if the passive income were removed. That amount, not your total tax bill, is the ceiling on what you can use currently. If it is small, a purchase rarely makes sense. The eligibility quiz helps you screen.

Worked example (illustrative)

An investor has wages and net rental income from a limited partnership. Total federal tax is $120,000. Recomputing with the passive rental income removed gives $45,000. The tax attributable to passive income is $75,000. That is the ceiling under §469; the §38(c) cap on $120,000 of tax would be 0.75 × $120,000 + $6,250 = $96,250 (assuming tentative minimum tax is lower), so §469 is the binding limit.

Item	Amount
Credit usable this year	$75,000
Cash price at 92 cents	$69,000
Difference	$6,000

Numbers are illustrative; a CPA must compute the tax attributable to passive income. If the investor bought $120,000 of credit the extra $45,000 would carry forward, not offset wages.

Exceptions that matter

• Real estate professionals may treat rentals as non-passive if they meet the tests in §469(c)(7). Then purchased credits attributable to rental activity would not be limited the same way; confirm with your CPA.
• Publicly traded partnerships have separate rules (§469(k)).
• Grouping elections change how activities are combined.

Educational information only, not tax, legal or investment advice, and no outcome is promised. Rules were checked against the cited sources on November 2, 2026; we found no new IRS guidance on §469 for credit transferees since the 2024 final regulations and FAQs. Ask a tax professional to compute the tax attributable to passive activities before any purchase. See our disclaimer.