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

References in periodicals archive ?
10) Consequently, a taxpayer can only take a passive activity credit against tax attributable to passive activity income.
This passive activity income from Property B can be offset by the $6,400 loss from Property A, so Brett reports a taxable profit of only a net $1,100.
Interest, capital gains, dividends, annuities, passive activity income and rental income are all considered investment income.
Taxpayers may only deduct passive activity losses to the extent they receive passive activity income.
Because IRC section 1411(c)(2) treats passive activity income as net investment income, such income will be exposed to the Medicare contribution tax.
4f) Likewise, passive activity income does not include reimbursements for such losses if (1) the reimbursement is includable in gross income under Treas.
If there is no passive activity income to use as an offset, the losses are suspended indefinitely until the investor sells his entire investment in the passive activity in a taxable transaction.
In general, losses from passive activities are deductible in a given year to the extent the passive activity income exceeds the losses from passive activities.
IRC section 469 states that a taxpayer can use losses from a passive activity only to offset passive activity income.
Considerations include the size of the interest payments, the amount of rental income received from the property, the availability of other passive activity income, and, of course, the taxpayer's AGI.
That means that any loss attributable to rental real estate - whether it's derived from a cash loss via a poor marketplace, or whether it's a `phantom loss' generated primarily through depreciation - falls into the passive category and can only be offset against passive activity income.
Losses (and credits) that a taxpayer cannot use because of the passive loss limitation rules are suspended and carry over indefinitely to be offset against future passive activity income (Sec.