The Basics About
The Tax Reform Act of 1986 created the categories of passive income and passive losses.* At the same time, it also limited the use and value of passive losses. For many taxpayers, the Act mandated that passive losses could be used only to shelter passive income; not portfolio income and not earned income. This means that every tax season taxpayers leave valuable deductions on the table. For taxpayers who have passive losses, those losses are simply unused and carried forward year by year.
The excess of passive activity deductions over your passive activity income.
Net rental income or income from a business in which the taxpayer does not materially participate.