Passive Activity Loss (PAL)

Passive Activity Loss (PAL) refers to a loss incurred from passive activities, which are typically investments in businesses that the taxpayer does not materially participate in, such as rental properties or limited partnerships.

Under the Internal Revenue Code, losses from passive activities can only be used to offset income from other passive activities. If a taxpayer has a PAL, it may be carried forward to future tax years to offset future passive income. For example, if a taxpayer incurs a loss of $10,000 from a rental property and has no passive income for that year, they cannot deduct that loss against their active income. Instead, the $10,000 loss can be carried forward to future years when they may have passive income to offset.