Question

The concept of passive activity loss limitations including:

1. Why were the passive loss rules enacted? What problem were they trying to solve?

2. To whom do the passive loss rules apply and what makes an activity passive or not passive?

3. What is the treatment of losses that are not allowed to be deducted in the current year?

4. How does material participation (or lack thereof) affect passive activity loss deductions? How is material participation achieved?

Answer 1

1. The passive loss rules were enacted as a part of the tax reform act 1986. It was enact to prevent the taxholders because of using the losses and credits to pay less tax. They were just helping the taxholders.

2. The passive loss rules apply to the individual, estates, trusts and pass through entities. The passive type of activites are-

a) interest

b) dividends

c) real property rents

d) gain from sale of real property

e) natural resources income

f) gain from sale of capital assets

All these activities are passive apart from these activities all the other activities are non passive