Passive losses

Passive Activity Loss

A loss resulting from a passive investment. For example, rental income is considered passive; if a tenant does not pay his/her rent, this may be considered a passive income loss. Passive income losses may only offset passive income gains; they may not offset earned income. Furthermore, passive income loss may not be carried back; it may only be carried forward.

Passive losses.

You have passive losses from businesses in which you aren't an active participant. These include limited partnerships, such as real estate limited partnerships, and other types of activities that you don't help manage.

You can deduct losses from passive investments against income you earn on similar ventures. For example, you can use your losses from rental real estate to reduce gains from other limited partnerships.

Or you can deduct those losses from any profits you realize from selling a passive investment. However, you can't use passive losses to offset earned income, income from your actively managed businesses, or investment income.

References in periodicals archive ?
The resulting reclassification can result in tax savings if the taxpayer has suspended passive losses and the incorrectly classified activity is generating taxable income.
In 2006 and 2007, Hardy had passive losses from unrelated rental activities that, due to a lack of passive income, could not be deducted under the passive loss limitations of Sec.
PIG/PAL Strategies can unleash frozen Passive Losses creating a non-taxable income.
A foreclosure on real property treated as a passive activity, "freed up" suspended passive losses under Sec.
The passive loss rule applies to passive losses incurred in tax years beginning after 1986.
Since passive losses are limited by the IRS to passive income, passive status limits your ability to maximize your losses and minimize your taxes.
The FA4517S EDFA allows amplification of optical broadcast and narrowcast signals, as needed, for extending reach or overcoming passive losses associated with splitting and combining of optical signals.
According to the Act, in order to deduct passive losses from rental activity, an individual must be a material participant in the real estate trade or business, and spend more than 750 hours and a minimum of 50 percent of their time in various real estate activities.
The court reversed a decision involving the collision of IRC section 1371, which effectively prohibits losses incurred by C corporations that later convert to S status, and IRC section 469, which suspends the utilization of passive losses until they are either netted against passive income or allowable in the year of disposition of the passive activity.
16] Thus, passive losses may only offset passive income and not operating income that is generally allowed for C Corporations subject to the passive loss rules.
The concept is still used today, but changes in the tax laws in 1986 limiting the use of passive losses to offset other income made it much less appealing to investors.
For a corporation in the 40 percent tax bracket (state and federal), that means about $400,000 in direct tax savings from the passive losses.