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Passive Activity Rules
IRS rules that limit the ability to deduct losses from passive activities against non-passive income.
Definition
Passive Activity Rules (IRC Section 469) govern how losses from passive activities — primarily rental real estate — can be used against other income. Under these rules, passive losses can only offset passive income, not active income like wages. Unused passive losses carry forward to future years or until the property is fully disposed of. There are two key exceptions: the $25,000 special allowance for active participants with AGI under $150,000, and Real Estate Professional Status, which reclassifies rental activities as non-passive. Understanding these rules is essential for tax planning because they determine whether your real estate depreciation deductions actually reduce your current tax bill or are deferred.
Related Terms
Passive Income
Income from rental properties or businesses in which the taxpayer does not materially participate.
Real Estate Professional Status
An IRS designation allowing real estate losses to offset active income by meeting specific hour requirements.
Depreciation
A tax deduction that accounts for the wear and tear of a property over its useful life.
Active Income
Income earned through active work, such as wages, salaries, or business income from material participation.
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