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 ?
A taxpayer is allowed to deduct passive activity losses only to the extent of the taxpayer's passive activity income arising from all passive activities.
Taxpayers may only deduct passive activity losses to the extent they receive passive activity income.
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.
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.
Passive activity losses in excess of passive activity income are not deductible.
Passive activities: With the inclusion of passive activity income in net investment income, it is even more critical that taxpayers properly identify their activities as passive or nonpassive and group them appropriately.
In other words, suspended passive activity losses from the years in which the corporation was closely held will still only be able to be offset against passive activity income and net active income.
Active or portfolio income 220,000 Passive activity income 20,000 240,000 Nonpassive deductions 20,000 Passive deductions 10,000 Taxable income
Also excluded from passive activity income are capital gains and losses from the disposition of property that is held for investment and not used in a passive activity or normally produces interest, dividends, annuity, or royalty income.
The limited partnership loss will carry forward and can be deducted in the future when D has passive activity income or disposes of his entire interest in the partnership.