How to Calculate Passive Loss

You may be able to benfefit from passive losses.

In the world of taxation, there are two different ways to make an income; through active or passive means. Active income includes income you have to work or manage directly, such as working for an employer or your own business. Passive income refers to income made in a passive activity like appreciation of an asset or capital gains form holding stocks or bonds. In order to calculate passive loss, you need to receive your annual statement of capital gains and losses from your broker or financial adviser.

Instructions

1. Distinguish passive from active. A passive activity generates losses without your actual involvement. If you are a worker or a manager of a project, you are taking an active role in the project. For instance, income earned from investments such as rental income, dividends or interest is considered passive income.

2. Exclude short-term rental property. Property that is used 30 days or less on average is considered short-term, such as hotels or vacation rentals.

3. Obtain your statement from your broker. This will confirm your profits and losses from investments.

4. Calculate the loss from passive activities. For instance, if you lost $100 in the stock market and sold your bonds at a discount to the price paid of $200, your total loss is $300.

5. Write off the maximum amount for passive losses. You can't write off your entire loss. However, you can write off a certain portion. This amount changes, so consult your tax accountant for the current threshold.

References

• IRS: Publication 925