Passive Loss Limitation Strategy
The Passive Loss Limitation Strategy refers to the method used to manage and potentially offset passive activity losses, which are losses incurred from investments in businesses or rental properties that the taxpayer does not materially participate in.
Under the Internal Revenue Code, passive losses can only be deducted against passive income, not against active income or portfolio income. This strategy involves careful planning and structuring of income and losses to maximize tax benefits.
For example, if an investor has passive losses from rental properties but also has passive income from a limited partnership, they can use the losses to offset that income, thereby reducing their overall tax liability. If passive losses exceed passive income, the excess losses can be carried forward to future tax years to offset future passive income.
Additionally, taxpayers may qualify for exceptions, such as the real estate professional status, which allows them to deduct passive losses against active income, further enhancing their tax planning strategies.
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