Magazine article Journal of Property Management

Passive Loss Limitation

Magazine article Journal of Property Management

Passive Loss Limitation

Article excerpt

The 1986 Tax Reform Act contained a provision known as passive loss limitation, which limited the amount of deductions for losses from passive activities to the amount of income those activities generate. Rental activity was deemed to be inherently passive even if rental activity is the principal business of the taxpayer or is an integral part of the taxpayer's real estate business.

The Budget Reconciliation Act of 1993 included a passive loss tax law change intended to allow individuals, whose primary business is real estate, to deduct rental property losses from their income. According to the Act, in order to deduct passive losses from rental activity, an individual must be a material participant in the real estate trade or business, and spend more than 750 hours and a minimum of 50 percent of their time in various real estate activities. Regulations released by the IRS in February 1995 were unfavorable to the real estate industry as they treated rental real estate activity differently than other real estate activity. Rules released in December 1995 were intended to allow individuals whose primary business is real estate to deduct rental property losses from income. …

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