Computations

Active Participation - up to $25,000 Loss
Qualifying taxpayers can deduct up to $25,000 of net loss (per year) from their active or portfolio income due to real estate activity.
*Important* Phase out: AGI $100,000 to $150,000; over $150,000, no deduction.

Passive Participation (limited partner)
Loss is only deductible to the extent of income generated by other passive activities. Understanding Suspended Loss and "At-Risk;"
Example: If you invest $20,000 in a passive activity and it has a $30,000 loss, then: $20,000 of the loss is suspended loss and $10,000 of the loss is "at-risk"

Treatment of Disallowed Losses
The purpose of the "passive loss" rule is to prohibit the taxpayer from deducting passive activity losses for other ordinary income and activities. The taxpayer must distinguish the income and loss category as one of the following: active, portfolio or passive. Passive losses will be disallowed or labeled as a "suspended loss" or "at-risk" if there is no passive income available to offset the loss.

Suspended Losses:
Passive activity losses that are disallowed a deduction in a given tax year are considered "suspended losses," which means that they may be carried forward into future years. The carry forward is indefinite until the taxpayer has passive income to offset the loss and credits.


If at a later date you materially participate in the same business that incurred the passive loss, then you may use those losses as an offset to the non-passive income of that activity (the losses remain as passive).

If a loss is disallowed due to at-risk rules, the loss can be carried forward into the first year that the activity (at-risk amount) becomes a positive amount. The loss can then be offset with gain.



Disposition of Passive Activities

Related Articles
  1. Taxes

    Capital Losses and Tax

    Capital losses are never fun to incur, but they can reduce your taxable income. Knowing the rules for capital losses can help you maximize your deductions and make better choices about when to ...
  2. Retirement

    Is Passive Investing Effective for Retirement Savings?

    Learn about the differences between active and passive investing for those approaching retirement. Discover how passive investing is gaining popularity.
  3. Managing Wealth

    Capital Losses and Tax

    When an investment sells for less than its purchase price, the difference is a capital loss.
  4. Small Business

    What is Passive Income?

    Passive income is earned by someone from ventures in which they did not actively participate.
  5. Taxes

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  6. Retirement

    Active vs. Passive Investing During Retirement

    How these two investing approaches work – and how to decide which best suits your precious nest egg.
  7. Insurance

    Deducting Disaster: Casualty And Theft Losses

    If you've been a victim, your losses may be deductible. Find out how.
  8. Investing

    Passively Managed Vs. Actively Managed Mutual Funds: Which is Better?

    Learn about the differences between actively and passively managed mutual funds, and for which types of investors each management style is best suited.
  9. Investing

    A Statistical Look at Passive Vs. Active Management

    Find out what the data has to say about the passive management Vs. active management debate, and why there isn't necessarily a clear winner.
Trading Center