What is the Difference Between Passive or Active Real Estate Tax Status?

The difference between passive and active real estate losses is the extent of the real estate investment activity.

Real estate investment losses are categorized by the IRS as active or passive losses for filing purposes. Losses are deductible and offset taxable rental income. Active losses provide a bigger tax break than passive losses.

Features

Taxpayers who are actively involved in real estate rentals, sales or development may claim an active loss. Most taxpayers who own rental properties are passive investors. Real estate losses may be a result of declining home values, casualty losses, rental losses and theft losses.

Identification

Passive losses are those which only produce rental property income and not income from real estate services. If the taxpayer is not able to sell a real estate related service, then the IRS will generally treat the loss as a passive loss. Passive losses may not be deductible unless the taxpayer has income. The taxpayer may deduct losses immediately when the taxpayer sells the home.

Benefits

Active losses are those which are a result of an income producing trade. The losses are limited to the taxpayer's basis or amount of the investment. Real estate salespeople and developers who use Schedule C to report gross income may typically claim active losses.

References

• Internal Revenue Service: Publication 925 (Real Estate Losses)

Resources

• SmartMoney: Tax Breaks for Losses on Rental Property Sales