Definition
IRS regulations that limit the ability to deduct passive activity losses against active income like wages or business profits.
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Rental properties are generally passive activities. Losses from passive activities can only be deducted against passive income, not active income. However, if you materially participate in managing the property (≥100 hours annually), it may be classified as active. Individuals earning under $100,000 can deduct up to $25,000 of passive losses annually if they actively participate. Losses above this limit carry forward indefinitely to future years.
Pro Tip
Document your property management activities to qualify for active participation status if possible.
Example
A rental property generated a $20,000 loss that could only offset passive income, not the investor's $150,000 salary.