Passive Activity Rules

Passive Activity Rules are tax regulations that limit how individuals can deduct losses from investments or businesses they do not actively manage. Generally, if you invest in a business or rental property but don't materially participate, your financial losses from that activity are considered "passive." You can only offset passive losses against passive income, not against regular income like wages or salaries. These rules aim to prevent taxpayers from using passive losses to lower their taxable income inappropriately while encouraging active engagement in investments. Understanding these rules can help in effective tax planning and investment strategies.