Rental Losses: Why Can't You Always Deduct Them?
A tax loss can be economically real but still limited. Classify the activity before calculating the current deduction.
General passive rule
Passive losses generally offset passive income and do not automatically offset salary or active business income.
Rental activities
Rental activities are generally treated as passive subject to important exceptions.
Active participation
Certain rental real estate taxpayers can qualify for a special allowance under applicable rules, subject to income limitations and other requirements.
Real estate professionals
A qualifying real estate professional faces a different analysis that still considers material participation and other requirements.
Suspended losses
Losses that cannot be currently deducted are generally tracked and may become usable later when passive income exists or a qualifying disposition occurs.
The takeaway
Classify the activity before deciding whether the loss is currently deductible.
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FAQ
Are rental losses always passive?
Generally, but important exceptions exist.
Do suspended passive losses disappear?
No. They can carry forward under applicable rules.
Does active participation equal material participation?
No.