Tax
Passive Activity Loss (PAL) Rules
IRC §469 rules limiting deductibility of losses from rental real estate and other passive activities against non-passive income.
Passive activity losses can only offset passive income — they cannot offset wages, business income, interest, or dividends. Rental real estate is automatically passive unless you qualify as a real-estate professional under §469(c)(7).
A $25,000 'special allowance' exists for individuals who actively participate in rental real estate, but phases out between $100K–$150K AGI.
Disallowed losses carry forward and become deductible against passive income in future years, or fully when the activity is disposed of.
Common pitfalls
- Assuming rental real estate generates immediately-deductible losses — usually it doesn't
- Mis-grouping activities — §469 grouping elections are made once and bind future years
- Missing the real-estate professional test (750 hours + more time in real-estate trades than any other trade) and treating spouse-aggregated time incorrectly
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