What is a passive activity?

A trade, business, or rental activity in which you do not materially participate. Material participation requires meeting one of 7 IRS tests including 500 hours per year.

How does the $25,000 rental loss allowance work?

Active rental real estate participants can deduct up to $25,000 in rental losses against ordinary income. This allowance phases out from $100,000 to $150,000 AGI and is fully eliminated above $150,000.

What happens to suspended passive losses?

Passive losses in excess of passive income are suspended and carry forward indefinitely. Suspended losses are released when the activity is disposed of in a fully taxable transaction.

Who qualifies as a real estate professional?

Must spend more than 750 hours per year in real estate trades/businesses where you materially participate, AND more hours in real estate than any other profession. Rental losses are then non-passive.

Are K-1 losses from LPs always passive?

Limited partners are generally passive by definition. General partners must apply the material participation tests. S-corp shareholders apply material participation tests to each activity.

US Passive Activity Loss (PAL) Rules Calculator

Calculate passive activity loss (PAL) limitations. Passive losses only offset passive income. $25,000 rental real estate allowance phases out $50,000-$100,000 AGI. Real estate professional exception.

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Frequently Asked Questions

What is a passive activity?

How does the $25,000 rental loss allowance work?

What happens to suspended passive losses?

Who qualifies as a real estate professional?

Are K-1 losses from LPs always passive?