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Can I take a tax deduction for a passive activity loss on my tax return?
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| The passive activity loss rules were enacted in 1986 to prevent individuals from using tax
shelters to reduce tax liability on their tax return by offsetting passive activity losses and passive activity
tax credits against
other taxable income. But the tax rules went beyond that and covered real estate investors and silent
partners in businesses. 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.
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| Phase-out of $25,000
passive activity loss allowance |
| If your
modified AGI is... |
Your
passive activity loss allowance is... |
| Up to $100,000 |
$25,000 |
| $110,000 |
$20,000 |
| $120,000 |
$15,000 |
| $130,000 |
$10,000 |
| $140,000 |
$5,000 |
| $150,000 or more |
$0 |
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| Special rules apply to persons who perform more than half of their
personal services, and more than 750 hours of such services for real property trades or
businesses in which they materially participate. |
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| Related tax
information about passive activity losses |
IRS publications about passive activity losses:
For additional information on limits on rental losses, refer to Chapter 10 of
IRS Publication 17, Your Federal
Income Tax, IRS Publication 925,
Passive Activity and At-Risk Rules, and Tax
Topic
425, Passive Activities - Losses and Credits. Please read this IMPORTANT
Editor's Note regarding navigating IRS publications with Adobe
Acrobat
Reader.
IRS publications can also be ordered by calling 1-800-829-3676. |
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