Passive Activity And At-Risk Rules - Disposition of Passive Activities

Disposition of Passive Activities

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Passive Activity Losses Carry Forward
The passive activity loss limitation is not a permanent disallowance of the loss rule, even if there\'s never any passive income to offset. If an investor disposes of their interest in the passive activity (generally a sale of the property in a taxable transaction), any suspended losses with respect to that interest in the passive activity are FULLY DEDUCTIBLE in the year of the disposition.

"Worthlessness" of a passive activity interest is also treated as disposition.

On a disposition, the suspended losses plus any current year income (or loss) from the activity are combined with the gain or loss from the disposition.

Real Estate Exceptions

Historic Rehabilitation Programs
These specific programs held as passive activity may generate a deduction-equivalent tax credit with a maximum of $25,000.

Working Interests in Oil and Gas
These activities are not treated as passive activity, provided that your liability is not limited. Therefore, losses from oil and gas working interests, directly allocated to the investor, are deductible against active or portfolio income without limits and without AGI phase outs.

Low-Income Housing
Investments in low-income housing activities that are held as passive activity investments are also an exception to the rule, and allowed a deduction-equivalent tax credit up to $25,000.

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