Passive Activity Loss

In order to limit the tax benefits of tax shelters, the tax code imposes loss limitations on entities that Congress defined as passive activities. Generally, passive activities are investments in which a taxpayer does not materially participate, and losses from such investments can be used only to offset income from other passive investments and cannot be deducted against other kinds of income such as wages, pensions, interest, dividends, capital gains, etc. Most real estate and limited partnership investments are classified as passive activities. There is an exception for rentals that taxpayers actively participate in and manage which allows up to $25,000 of loss to be deducted. However, this special exception phases out for AGIs between $100,000 and $150,000.