This post is part of our series on Taxes Related to Real Estate
- Real Estate Rental Income and Expenses
- Understanding Capital Gains and Losses
- General ITIN (Individual Taxpayer Identification Number) Information
- What is Net Investment Income Tax (NIIT)?
- What is FIRPTA Withholding?
- Taxes When Renting Residential and Vacation Property
Generally, losses from passive activities that exceed the income from passive activities are disallowed for the current year. You can carry forward disallowed passive losses to the next taxable year. A similar rule applies to credits from passive activities.
Material and Active Participation
Passive activities include trade or business activities in which you do not materially participate. You materially participate in an activity if you are involved in the operation of the activity on a regular, continuous, and substantial basis. In general, rental activities, including rental real estate activities, are also passive activities even if you do materially participate. However, rental real estate activities in which you materially participate are not passive activities if you qualify as a real estate professional. Additionally, there is a limited exception for rental real estate activities in which you actively participate. The rules for active participation are different from those for material participation.
Disposition of Entire Interest
- Generally, you may deduct in full any previously disallowed passive activity loss in the year you dispose of your entire interest in the activity.
- In contrast, you may not claim unused passive activity credits upon disposition of your entire interest in the activity. However, you may elect to increase the basis of the credit property in an amount equal to the portion of the unused credit that previously reduced the basis of the credit property.