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Passive Activity Loss Rules

What is 'Passive Activity Loss Rules'

A set of rules that prohibits using passive losses to offset earned or ordinary income. Passive activity loss rules prevent investors from using losses incurred from income-producing activities in which they are not materially involved.

Being materially involved with earned or ordinary income-producing activities means the income is active income and may not be reduced by passive losses. Passive losses can be used only to offset passive income.

Explaining 'Passive Activity Loss Rules'

The key issue with passive activity loss rules is material participation. If the taxpayer does not materially participate in the activity that is producing the passive losses, then those losses can only be declared against passive income. If there is no passive income, then no loss can be deducted.

Passive activity losses can only be carried forward; they cannot be carried back.


Further Reading


Tax Policy and the Passive Loss Rules: Is Anybody Listening
heinonline.org [PDF]
… the statute is deter- mining what income and losses derive from passive activities, the great … technical complexities appear to involve the understanding of how the passive loss rules work with … The basic rule provided in the statute is that passive activity losses and passive activity …

A Whirlwind Tour of the Internal Revenue Code's At-Risk and Passive Activity Loss RulesA Whirlwind Tour of the Internal Revenue Code's At-Risk and Passive Activity Loss Rules
www.jstor.org [PDF]
… the statute is deter- mining what income and losses derive from passive activities, the great … technical complexities appear to involve the understanding of how the passive loss rules work with … The basic rule provided in the statute is that passive activity losses and passive activity …

At-risk and passive activity limitations: can complexity be reducedAt-risk and passive activity limitations: can complexity be reduced
heinonline.org [PDF]
… the statute is deter- mining what income and losses derive from passive activities, the great … technical complexities appear to involve the understanding of how the passive loss rules work with … The basic rule provided in the statute is that passive activity losses and passive activity …

The Passive Activity Provisions--A Tax Policy BlooperThe Passive Activity Provisions--A Tax Policy Blooper
heinonline.org [PDF]
… the statute is deter- mining what income and losses derive from passive activities, the great … technical complexities appear to involve the understanding of how the passive loss rules work with … The basic rule provided in the statute is that passive activity losses and passive activity …

Timber Growers and the Passive Activity Loss Rules: Some Unintended EffectsTimber Growers and the Passive Activity Loss Rules: Some Unintended Effects
heinonline.org [PDF]
… the statute is deter- mining what income and losses derive from passive activities, the great … technical complexities appear to involve the understanding of how the passive loss rules work with … The basic rule provided in the statute is that passive activity losses and passive activity …

Passive Activity Losses, Trusts, and Estates: The Regulations (If I Were King)Passive Activity Losses, Trusts, and Estates: The Regulations (If I Were King)
heinonline.org [PDF]
… the statute is deter- mining what income and losses derive from passive activities, the great … technical complexities appear to involve the understanding of how the passive loss rules work with … The basic rule provided in the statute is that passive activity losses and passive activity …

Material Participation Under the Passive Activity Loss ProvisionsMaterial Participation Under the Passive Activity Loss Provisions
heinonline.org [PDF]
… the statute is deter- mining what income and losses derive from passive activities, the great … technical complexities appear to involve the understanding of how the passive loss rules work with … The basic rule provided in the statute is that passive activity losses and passive activity …

Effects of the Tax Reform Act of 1986 on corporate financial policy and organizational formEffects of the Tax Reform Act of 1986 on corporate financial policy and organizational form
www.nber.org [PDF]
… the statute is deter- mining what income and losses derive from passive activities, the great … technical complexities appear to involve the understanding of how the passive loss rules work with … The basic rule provided in the statute is that passive activity losses and passive activity …

A Policy Critique of the Section 469 Passive Loss RulesA Policy Critique of the Section 469 Passive Loss Rules
heinonline.org [PDF]
… the statute is deter- mining what income and losses derive from passive activities, the great … technical complexities appear to involve the understanding of how the passive loss rules work with … The basic rule provided in the statute is that passive activity losses and passive activity …



Q&A About Passive Activity Loss Rules


How can you tell if your participation in an activity is material enough so as not to fall under these rules?

If your participation in an activity is material enough so as not fall under these rules, then it will most likely qualify as active participation and therefore will allow you use your losses against other types of taxable income such as wages and interest from bank accounts.

Can you deduct a loss from a business venture on your personal taxes even though it was incurred during business hours but outside of work hours?

No, only those losses incurred during regular working hours may be deducted on personal taxes; all others may only be deducted on business taxes.

What is a passive activity?

A passive activity is an income-producing activity in which the investor does not materially participate.

Can you carry forward a loss from one year into another year if it cannot be used in that current tax year because of this rule?

No, you cannot carry forward a loss from one year into another year if it cannot be used in that current tax year because of this rule.

Are there any exceptions to the Passive Activity Loss Rules?

Yes, there are exceptions.

What are the rules that prohibit using passive losses to offset earned or ordinary income?

The set of rules that prohibits using passive losses to offset earned or ordinary income are called the Passive Activity Loss Rules.

What do you need to be materially involved with earned or ordinary income-producing activities for them not to be subject to the Passive Activity Loss Rules?

You must be materially involved with earning or ordinary income-producing activities for them not to be subject to the Passive Activity Loss Rules.