Can I take a tax deduction for a passive activity loss on my tax return?

Identify your passive activity losses and passive activity income such as limited partnership investments and rental activities, which generally include all income or losses other than those related to an active trade or business, or portfolio income (e.g., interest, dividends, royalties, annuities, and gain or loss from the sale of portfolio assets).

In general, passive activity losses can only offset passive activity income, and passive activity tax credits can only be used against tax attributable to passive activity income on your tax return. Any disallowed passive activity losses and passive activity tax credits are tax deferred until passive activity income is generated or the passive activity is disposed of in a taxable transaction.

If your rental of real estate is a passive activity, you may generally offset a passive activity loss of up to $25,000 against your non passive income on your tax return if you actively participate in the passive activity. However, married persons filing separate tax returns who lived together at any time during the tax year may not claim this offset on their tax returns. Married persons filing separate tax returns who lived apart at all times during the tax year are each allowed a $12,500 maximum offset for passive activity real estate on their tax returns. The allowance is phased-out if your modified adjusted gross income is between $100,000 and $150,000.