Article Date:
February 2023

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Plan Your Passive Activity Losses for Tax-Deduction Relevance

In 1986, lawmakers drove a stake through the heart of your rental property tax deductions.


That stake, called the passive-loss rules, causes myriad complications that now, 38 years later, are still commonly misunderstood.


The Trap


In 1986, lawmakers made you shovel your taxable activities into three basic tax buckets. Looking at the buckets from a business perspective, you find the following:



Portfolio bucket for your stocks and bonds


Active business bucket for your material participation business activities


Passive-loss bucket for your rentals plus other activities in which you do not materially participate


This article explains three escapes from the passive-loss trap so that you can realize the tax benefits from your rental losses.


Escape 1: Get Out of Jail Free


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