Understanding Passive Loss: Leveraging Non-Active Income Strategies
Passive loss stems from a business activity where one does not actively participate, such as renting out real estate when the individual is not principally in the property leasing business. Losses incurred from this type of activity are categorized as passive losses.
Maximizing Tax Benefits§
Importantly, passive losses are only eligible for tax deductions equivalent to the amount of passive gains for the given year. Any additional loss amount can be carried over to subsequent years.
Example Scenario§
Imagine a scenario where rental property—a passive activity—earns a profit of $10,000 over the first six months and incurs a $6,000 loss over the ensuing six months. This results in a deductible passive loss of $6,000 for the year. The surplus $4,000 can then be deducted in the following tax year.
Leveraging these passive activity rules effectively can yield significant tax advantages, especially for those strategically involved in real estate investments without actively managing them.
Related Terms: Passive Activity, Active Income, Real Estate Investment, Tax Credits, Deduction Limits.
