Accounting & tax
Passive activity loss
A loss from an activity treated as passive under federal tax rules that may be limited in the current year and carried forward.
Glossary
Accounting & tax
Primary references on this page:
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IRS Publication 925: Passive Activity and At-Risk RulesA passive activity loss occurs when deductible expenses allocated to passive activities exceed income from those activities. Federal tax rules generally treat rental activities as passive, subject to exceptions and special rules. Calling a landlord active in day-to-day operations does not by itself establish the tax classification.
A loss shown by the property books is not automatically deductible in full on the current return. Passive activity limitations, at-risk rules, basis limits, personal-use rules, and other provisions can affect timing and amount. A disallowed passive loss is generally tracked for possible use in a later year rather than erased from the record.
Active participation, material participation, and real-estate-professional status are different tax concepts with different tests. The label on a property-management agreement or the number of landlord tasks completed does not settle them. Grouping elections and the way activities are defined can also affect the analysis.
Keep a property-level income and expense trail, participation records where relevant, prior-year carryforwards, ownership changes, and disposition documents. The tax result depends on the taxpayer and the full activity portfolio, so a calculator or generic definition cannot determine the deductible amount.
Book loss versus currently deductible tax loss
A rental can show a book or Schedule E loss after expenses and depreciation while still producing positive cash flow because depreciation is noncash. The passive-loss rules then ask whether and when the tax loss can offset other income. These are separate steps, and neither should be inferred from the bank balance.
Carryforward control for a small portfolio
Maintain a schedule by activity and tax year showing the loss generated, amount allowed, amount suspended, and event supporting later use. Reconcile that schedule to Form 8582 or the applicable return workpapers each year.
This is general educational information, not legal or tax advice. Rules vary by state and locality and change over time — check your local law and confirm specifics with a qualified professional.