Get Form 8582-CR Passive Activity Credit Limitations See Separate Instructions

The passive activity loss rules generally prevent taxpayers with adjusted gross income (AGI) above $100,000 from deducting some or all losses from real estate rentals, other than the rental of your home that was also used for personal purposes. There is an exception to these rules for real estate professionals.

Passive activity loss rules state that passive losses can be used only to offset passive income. A passive activity is one in which the taxpayer did not materially participate during the year in question. Common passive activity losses may stem from leasing equipment, real estate rentals, or limited partnerships.

Under the passive activity rules you can deduct up to $25,000 in passive losses against your ordinary income (W-2 wages) if your modified adjusted gross income (MAGI) is $100,000 or less. This deduction phases out $1 for every $2 of MAGI above $100,000 until $150,000 when it is completely phased out.

You Can Carry Losses Forward The passive activity loss limitations are applied each year. But rental losses continue to carry forward year after year until the losses are either used up by offsetting rental profits or by being deducted against other income.

Generally, passive activity losses that exceed the passive activity income 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.

Noncorporate taxpayers use Form 8582-CR to: Figure the amount of any passive activity credit (PAC) for the current tax year (including any prior year unallowed credits) and the amount of credit allowed for the current year.

If you or your spouse actively participated in a passive rental real estate activity, the amount of the passive activity loss that's disallowed is decreased and you therefore can deduct up to $25,000 of loss from the activity from your nonpassive income.

If these passive losses exceed your passive income, they are suspended and carried forward indefinitely until future years, when you either have passive income or sell a property at a gain.