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.
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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.