Articles · Basics · Individual Income Tax and Form 1040
Passive Activity Loss Rules in Plain English
Section 469 prevents taxpayers from using losses from passive activities to shelter wages, interest, and similar income.
What counts as passive
An activity is passive if it is a business in which the taxpayer does not materially participate. Rental activities are generally passive regardless of participation, with an exception for qualifying real estate professionals.
Material participation has several tests. The best known is working more than 500 hours in the activity during the year.
How the limit works
Passive losses can offset passive income. Any excess is suspended and carries forward on Form 8582. When the taxpayer disposes of their whole interest in a fully taxable sale to an unrelated party, the suspended losses are generally released.
Rental exceptions
Individuals who actively participate in a rental can use up to $25,000 of loss against other income, phased out as modified AGI rises from $100,000 to $150,000.
A real estate professional who performs more than 750 hours and more than half of their personal services in real property trades, and who materially participates, can treat the rental as non-passive.
Key takeaways
- Passive losses offset passive income only.
- Suspended losses are released on a full taxable disposition.
- Rentals have special allowances and exceptions.
For general education only, not tax advice. Tax law changes often, so confirm current rules and amounts with primary sources.