Passive income
Income earned without material participation, in tax terms. Most rental income counts as passive by default. Losses from passive activities can only offset other passive income, with some exceptions.
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Part 1 of 4
Why a seller cares
Rental income is passive by default in the tax code, and passive losses can generally only offset passive income. It is why years of paper losses on a rental may be waiting to be used at the sale.
Part 2 of 4
A simple example
Your rental showed $4,000 of losses a year for six years that you could not deduct against your salary. At sale, the suspended $24,000 is released.
| The situation | What happens to the losses |
|---|---|
| Each year, income too high to use them | Suspended and carried forward |
| The year the rental is sold | Released against the gain and other income |
| Real estate professional status | Usable each year instead |
Passive losses wait. The sale is usually when they stop waiting.
Part 3 of 4
What people get wrong
That passive income means no work. In the tax code it is a category, and a landlord fixing toilets still has passive income.
Part 4 of 4 · where to read next
Where it appears in the sale
What a definition is, and what it isn't
Keighbor is a software company, not a law firm, brokerage, or tax adviser. This is general information, not legal, tax, financial, or real estate advice about your sale. Your situation may differ. Before acting on a contract, disclosure, title, tax, or pricing question, ask an appropriately licensed professional in your state.
Written and researched by Keighbor Research · drawn from the reference glossary · how we research and check what we publish
In your Room, this word explains itself where it appears.
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