What Is a Suspended Loss?

A suspended loss is a capital loss that cannot be realized in a given tax year due to passive activity limitations. These losses are suspended until they can be netted against passive income in a future tax year. Suspended losses are incurred as a result of passive activities, and can only be carried forward, known as a 澳洲幸运5官方开奖结果体彩网:capital loss carryover.

Understanding Suspended Losses

While many losses incurred in a given tax year can be deducted in the same year they occur, losses generated from 澳洲幸运5官方开奖结果体彩网:passive activities can only be used to offset income or gains generated from other p🎶assive activities.

These rules, set forth by the 澳洲幸运5官方开奖结果体彩网:Internal Revenue Service (IRS), are known as the 澳洲幸运5官方开奖结果体彩网:Passive Activity Loss (PAL) rules. Investors are prevented from using losses incurred from income-producing activities in which they are not materially involved to offset 澳洲幸运5官方开奖结果体彩网:ordinary income. Income from rental properties is generally considered passive, even if you materially participated in their management. However, if you qualify as a real estate professional, then your participation isn't classified as passive.

Passive losses are only 澳洲幸运5官方开奖结果体彩网:deductible up to the amount of passive income. When the passive loss incurred is greater than the passive income generated, the excess loss can be suspended and carried forward indefinitely until the entity has enough passive income to absorb the suspended loss or until the activity is disposed of.

Any loss that exceeds passive income is called a suspended loss. For example, if a taxpayer has a passive lossꦺ of $8,000 and a passive incomꦜe of $3,500, their suspended loss is $4,500.

Deducting Suspended Losses

A taxpayer who disposes of his entire interest in a passive activity may deduct the full amount of the suspended loss remaining for that activity at that time. Following our example above, if the individual carries forward the suspended loss for five years at which point he disposes of his interest in this activity, he may deduct the full $4,500.

Suspended losses can also be used to offset income realized in a later year that is generated from material participation in the activity that initially produced the loss. In this case, losses from an activity in which a taxpayer materially participates are subject to the 澳洲幸运5官方开奖结果体彩网:at-risk rules, not the PAL rules.

For example, if a taxpayer incurs a $6,000 suspended loss in one year from a passive activity and then materially participates in the activity the following year and earns $10,000, then the suspended loss may be applied against $6,000 of the earned income, leaving the taxpayer with $4,000 of declarable income for the year.

Example of Suspended Losses

A famous case of suspended losses leading to reductions in 澳洲幸运5官方开奖结果体彩网:tax liability is President Donald Trump. According to The New York Times, Trump’s 1995 tax filings “declared losses of $915.7 million, giving him a tax deduction so substantial that it could have allowed him to legally avoid paying federal income taxes on hundreds of millions of dollars of income for almost two decades.”

The Bottom Line

Don't be fooled by the name: Passive losses don't mean you lose the ability to deduct them. Rather, they are suspended losses incurred from passive income and can be carried forward. If you want to claim these losses, you must have passive income related to the losses. For instance, if you own an investment property and have losses, you can deduct a certain portion of those losses against the income your rental property produces. Keep in mind, though, that you can't use these losses to offset any unrelated income, such as any earnings from an employer.