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. 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.
  2. Investing

    Active or Passive Investing? What's Best for You

    Be strategic about which of these investing strategies you follow (and when).
  3. Managing Wealth

    Capital Losses and Tax

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

    Why Your Passive Fund Is Crushing Active Managers

    A new study shows passive funds outperformed over 5, 10 and 15 years
  5. Taxes

    Here's How to Deduct Your Stock Losses From Your Tax Bill

    Learn the proper procedure for deducting stock investing losses, and get some tips on how to strategically take losses to lower your income tax bill.
  6. 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.
  7. Financial Advisor

    Top Tips for Deducting Stock Losses

    Investors who know the rules can turn their losing picks into tax savings. Here's how to deduct your stock losses.
  8. Investing

    Active Management Case Study: Comparing Index to Actively Managed Fees (MORN)

    Find out how actively managed funds compare with passively managed funds in terms of cost and whether higher cost funds outperform lower cost funds.
  9. Investing

    Why Passive Investing Isn't Always a Winning Strategy

    New research suggests that passive investors don’t come out ahead all of the time, and active portfolio management still plays a viable role in investing.
Frequently Asked Questions
  1. Who determines interest rates?

    In countries using a centralized banking model, interest rates are determined by the central bank. In the first step of interest ...
  2. What's the Best Way to Contact Warren Buffett?

    Learn how to contact Warren Buffett and what kinds of contact is most likely to receive a response from him or from his company, ...
  3. What is the Financial Services Sector?

    A diverse group of companies, beyond banks and credit unions, comprises the financial services sector.
  4. Who are Whole Foods' (WFM) main competitors?

    Whole Foods' main competitors are Sprouts Farmers Markets and Trader Joe's. However, the recent acquisition by Amazon my ...
Trading Center