Understanding Passive Activity Loss Limitations: A Comprehensive Guide

TLDRIn this video, we dive into Form 8582 for Passive Activity Loss Limitations, focusing on a scenario where a taxpayer actively participates in a rental property. We cover the $25,000 special allowance deduction, rules for passive activity losses, and eligibility for active participation. Additionally, we explore the financial thresholds and limitations to claim losses against non-passive income.

Key insights

:busts_in_silhouette:Passive activity losses cannot be used to offset income from non-passive activities.

:house:Rental real estate activities are generally considered passive activities unless specific exceptions are met.

:heavy_check_mark:To qualify as an active participant, minimal involvement, such as approving tenants, is required.

:bar_chart:The special allowance for active participation allows up to $25,000 in rental property losses to offset non-passive income, subject to limitations.

:ledger:Modified Adjusted Gross Income (AGI) thresholds and calculations determine the amount of special allowance deductible.

Q&A

Can I use rental real estate losses to offset income from my job?

—No, passive activity losses from rental real estate cannot be used to offset income from non-passive activities, such as wages.

What is an active participant in rental real estate activities?

—An active participant is someone who is minimally involved in the rental property, such as approving tenants.

How much of my rental property losses can I deduct?

—The special allowance for active participation allows up to $25,000 in rental property losses to be deducted against non-passive income, subject to limitations based on your Modified AGI.

What are the Modified AGI thresholds for claiming the special allowance?

—For the special allowance to apply, your Modified AGI must be below $150,000. The deduction is phased out above this threshold.

What happens to rental property losses that exceed the special allowance?

—Any rental property losses that exceed the special allowance are considered unallowed losses and can be carried forward to future tax years.

Timestamped Summary

00:02Introduction to the video topic: Form 8582 for Passive Activity Loss Limitations

01:05Explanation of passive activity losses and their inability to offset income from non-passive activities

03:10Definition of passive activities and rental real estate activities

04:59Overview of the requirements for active participation in rental real estate activities

07:08Explanation of the special allowance for active participation and its limitations based on modified AGI

09:50Demonstration of completing Form 8582 and calculating the deductible rental property losses

11:19Reconciliation and reporting of deductible rental property losses

12:28Conclusion and invitation for questions or comments

Browse more