1. Investment and Personal Financial Planning
Chapter 16
Investment and Personal Financial Planning

2. Passive Activity Loss Limitations
A third category of investment activities is called “passive” activities—different from “portfolio” activities
Passive activities include:
Rental activities (chiefly rental real estate activities)
Activities conducted by partnerships in which taxpayer is a limited partner
Other non-portfolio activities in which taxpayer does not “materially participate” (generally < 500 hours participation/year)
Net losses from passive activities are not deductible until a subsequent year when:
Taxpayer has net passive income; or
Taxpayer completely disposes of interest in passive activity.

3. Example Taxpayer has income and loss as follows:
Wages, salaries $195,000
Taxable interest income ,000
Income from limited partnership ,000
Loss from limited partnership 2 (33,000)
AGI?

4. Special Rules for Real Estate Investments
General Rule: rental real estate activities are passive activities.
Exceptions:
If taxpayer “actively” participates in management—up to $25,000 losses deductible each year
Amount is reduced (phased out) by 50 cents for each dollar AGI exceeds $200,000 (before deducting real estate loss)
Real estate professionals not subject to passive activity loss limitations on their real estate activities