passive activity income

passive activity income

Income earned from a passive activity. The IRS segregates certain types of income and expenses so that passive activity expenses are deductible only from passive activity income.If expenses are greater than income,the taxpayer may not use additional deductions to shelter other income (such as regular payroll income), but must carry the losses forward and use them in a future year.As a general rule,there are two types of passive activities:

1. Trade or business activities in which the taxpayer does not materially participate (less than 500 hours, generally) during the year.

2. Rental activities, even if the taxpayer does participate in them, except for the following:

a. The taxpayer is a real estate professional.

b. The rental is a dwelling the taxpayer uses for more than 14 days per year or 10 percent of the days the dwelling was available for rental, whichever is greater.

c. Taxpayers may deduct up to $12,500 in losses ($25,000 if married) from passive activi- ties if they or their spouse actively participated in it. There is a phaseout for various income levels.

d. Low-income housing credits are available up to a maximum of $25,000.

(The rules are extremely complicated, and there are many exceptions. For further information see Publication 925:“Passive Activity and At-Risk Rules” and Tax Topics 425:“Passive Activities—Losses and Credits”at the IRS Web site www.irs.gov.)