Passive Loss Rules – Will the IRS Believe Your Losses?

If you have a well-paying day job and lose money in a different business endeavor, consider yourself forewarned – The IRS may not believe what you tell them about how you spend your time, and the United States Tax Court may doubt you as well. To engage in sophisticated income tax planning – click here – to learn more.

Passive activity loss rules require us to separate our trade or business activities into passive and non-passive buckets. The distinction between passive and active income is important because one can only claim a passive loss against income generated from passive activities. One cannot claim a passive loss against active income.

Losses suspended under the passive activity loss rules are ultimately allowed when there is passive income or the activity is disposed of.

For example, real estate rental activity is a passive activity.

There is an exception for people who work in real estate trades or business, though the standard of working 750 hours on real estate is difficult to meet for anyone who has a significant non-real estate job.

The expression “ballpark guestimate” is commonly thrown around in these cases.  If you work a full time job outside of real estate you will need to keep detailed time records to qualify as working in a real estate trade or business.

If you have large passive losses or want to engage in sophisticated income tax planning, contact the Law Offices of Givner & Kaye today. (310) 207-8008