I.R.S. Passive Income Rules Explained: A Guide for Landlords and Investors
The Internal Revenue Service (IRS) divides income into active, portfolio, and passive categories. Passive income typically comes from rental activities or businesses in which you do not materially participate. Critically, passive losses can only offset passive income—they cannot reduce wages or investment returns. This article provides a plain-language explanation of the IRS passive income rules, including the material participation tests (e.g., more than 500 hours per year), the $25,000 special allowance, real estate professional status, loss carryforward rules, and practical examples for landlords, small business owners, and investors. It also offers actionable recordkeeping tips, common misconceptions, and guidance on discussing your situation with a tax preparer.
