Many taxpayers carry suspended passive activity losses on their current tax returns. The Tax Reform Act of 1986 created new categories of income and loss – passive income and loss. The Act mandated that passive losses can only be used to offset passive income. Passive income and losses are generated by a business or entity that the taxpayer owns or invests in, but does not actively manage. In general, ownership of commercial real estate without management responsibility is considered passive activity.
During tax season, many taxpayers realize passive losses that cannot be utilized against their active or portfolio income, and who have no source of passive income. IRS Form 8582 is used to reflect carry-forward passive activity losses.
Income generated by AEI Funds and DSTs is categorized as passive income and may be offset by passive losses from other investments.
Passive Income + Passive Losses = Non-Taxable Income
A taxpayer’s passive income can be off-set by passive losses dollar-for-dollar to produce non-taxable income. There is no limitation on the amount of passive income that can be off-set by passive losses.
Source: www.irs.gov | Topic 425 – Passive Activities – Losses and Credits