Passive Activity Loss Rules
Passive activity loss rules limit deduction of losses from activities without material participation to the extent of passive income, with suspended losses carried forward.
Exam Tip
Passive losses only offset passive income. $25,000 exception phases out $100K-$150K. RE pro: 750 hours. Complete disposition releases suspended losses.
What are PAL Rules?
Passive losses only offset passive income.
Material Participation Tests
- 500+ hours in activity
- Substantially all participation
- 100+ hours and more than anyone else
$25,000 Exception
Active rental real estate participants: up to $25,000 against non-passive income, phases out $100K-$150K MAGI.
Real Estate Professional
750+ hours in real property trades can treat rentals as non-passive.
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