Definition
Passive loss limitations restrict deducting passive losses against W-2 wages (except for real estate professionals). This significantly affects high-income investors.
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Passive activity rules limit deduction of real estate losses against W-2 wages. Exceptions include active real estate professionals (no dollar limit, versus the $25,000 allowance for other landlords, which phases out between $100,000 and $150,000 of modified AGI). Passive loss limitations affect high-income investors significantly.
Pro Tip
Understand passive loss limitations if investing while employed.
Example
Real estate professional with $150,000 W-2 income and $100,000 paper loss can deduct $100,000; a non-professional with that income cannot use the $25,000 allowance at all