Passive Activity Loss Limitations

By | April 23, 2014

What are Passive Activity Loss Limitations?

Generally, passive activity losses exceeding passive income are not allowed to be used to deduct activities in the present year. The loss denied to passive activities are transferred to the next tax year. A similar rule applies to credits from passive activities.

Passive activities include activities of a trade or business in which you do not “materially participate.” You materially participated in an activity when involved in the operation of such activity on a regular, continuous and substantial. Generally, rental activities, including the activities of real estate rentals are passive activities, even if you materially participated in it. However, the activities of rental real estate in which you materially participated are not passive activities if you qualify as a “real estate professional”.


Rental Real Estate Loss Rules

In addition, there is a limited exception to the activities of rental real estate in which you “actively participate”. The active participation rules are different from the materiality rule. The guidelines for determining material participation, rules for real estate professionals, active participation and the special rules that apply to income and losses from a passive activity conducted through a commercial company traded PTP (for their acronym) may found in Publication 925 , Passive Activity and At No Risk Rules (passive Activities rules amount risk).

Passive Activity Loss Limitations

What can you deduct? Generally, you can deduct the full amount of the passive activity loss that was previously denied in the year. On the other hand, you can not claim credit for unused passive activity disposed of. However, you may elect to increase the basis of property for which the taxpayer is given credit for an amount equal to the unused portion of the credit that previously reduced the basis of such property.


IRS Passive Activity Loss Limitations Form 8582

Use Form 8582 , Passive Activity Loss Limitations (Limitations on passive activity losses) to summarize income and losses from passive activities and to calculate the deductible losses. Use Form 8582-CR , Passive Activity Credit Limitations (Limitations on passive activity credits) to summarize the credits from passive activities and calculate the passive activity credit allowed. You can also use the Form 8582-CR to choose to increase the basis of property for which credit is granted when you dispose of it.