Passive Activity Rules
Passive activity rules under Section 469 limit the deduction of losses from passive activities to the amount of passive income, preventing taxpayers from sheltering active or portfolio income.
Explanation
A passive activity is any trade or business in which the taxpayer does not materially participate, plus all rental activities (with limited exceptions). Suspended passive losses carry forward and are fully deductible when the taxpayer disposes of the activity in a taxable transaction. The real estate professional exception allows qualifying taxpayers to treat rental activities as nonpassive. The $25,000 rental loss allowance is available to active participants with AGI under $100,000, phased out completely at $150,000 AGI.
Key Points
- •Passive losses can only offset passive income
- •All rental activities are generally passive (exceptions for real estate professionals)
- •$25,000 rental loss allowance phases out between $100K–$150K AGI
Exam Tip
Suspended passive losses are released in full upon a fully taxable disposition of the activity to an unrelated party.
Frequently Asked Questions
Related Topics
Individual Taxation
Individual taxation covers the rules for computing taxable income, deductions, credits, and tax liability for individual taxpayers under the Internal Revenue Code.
Partnership Taxation
Partnerships are pass-through entities that file Form 1065 and allocate income, deductions, gains, losses, and credits to partners via Schedule K-1.
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