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. Small Business

    What is Passive Income?

    Passive income is earned by someone from ventures in which they did not actively participate.
  2. 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.
  3. 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.
  4. 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.
  5. Taxes

    How Taxpayers Can Do A Legal Wash Sale

    The wash sale rule can result in the disallowance of a much-needed deduction. Here you can learn what constitutes a wash sale and how to avoid it.
  6. Investing

    4 Best Passive Income Investments

    Generating income from passive investments begins with knowing which ones are the best fit for your portfolio.
  7. Investing

    Funds with the Largest Inflows for September, 2016 (VTI, XLRE)

    As the third quarter drew to a close, investors continued to pour money into passive funds, while active funds battled heavy outflows.
  8. Taxes

    Smart Year-End Tax Moves for 2016 (Part Two)

    Here's are some crucial tax planning strategies for investments, Social Security and Medicare.
Frequently Asked Questions
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The concept of CAGR is relatively straightforward and requires only three primary inputs: an investments beginning value, ...
  2. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors with insight into how efficiently a company (or more specifically, ...
  3. What is the difference between Communism and Socialism?

    Learn how some countries are incorporating socialist methods into capitalism.
  4. What's the difference between a stop and a limit order?

    A limit order is an order that sets the maximum or minimum at which you are willing to buy or sell a particular stock. With ...
Trading Center