Passive Activity And At-Risk Rules - Computations and Treatment of Disallowed Losses
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.
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