Section 469 Passive Activity Rules: Loss Limitations, Ordering Rules, and Utilizing Losses

Since their adoption, the PAL limitations rules have challenged and frustrated tax advisers. Taxpayers generally may not use losses from activities in which they are passive investors to offset ordinary income earned in an active trade or business. Whether a taxpayer's involvement in an activity rises to the level of active participation is frequently subject to IRS examination and challenge.

Treatment of losses generated from the rental of real property is particularly complicated. The regulations specifically include rental real estate within the definition of passive activities. However, numerous provisions provide both allowances for threshold loss amounts and differing standards regarding the level of involvement and activity required of taxpayers to utilize losses from rental activities.

Tax advisers must navigate the lengthy and challenging guidance on PALs to avoid expensive mistakes. When the taxpayer has significant real estate investments, incorrectly sorting out which losses can offset ordinary and business income can have costly tax consequences. The IRS continues to focus on passive income and losses since the imposition of the 3.8 percent net investment income tax.

Listen as our expert panel provides a thorough and practical guide to understanding the PAL rules, calculating what income and loss must be classified as passive, calculating PAL carryforwards, reporting PAL limitations on Form 8582, and identifying planning opportunities and elections to minimize the impact of PAL limitations.