Can active income offset passive income?
Under U.S. tax law, the distinction between active income and passive income is important for tax purposes. Active income typically comes from wages, salaries, commissions, or any business activity in which the taxpayer materially participates. Passive income, on the other hand, generally comes from rental activities or businesses in which the taxpayer does not materially participate. As a general rule, passive losses can only be used to offset passive income, not active income. This is due to the passive activity loss (PAL) rules, which were designed to prevent taxpayers from using losses from passive activities to offset income from non-passive (active) sources. However, there are exceptions to this rule: 1. **Active Participation in Real Estate**: If you actively participate in a real estate rental activity, you may be able to deduct up to $25,000 of loss from the activity from your nonpassive income. This exception phases out for taxpayers with modified adjusted gross income (MAGI) between $100,000 and $150,000. 2. **Real Estate Professionals**: If you qualify as a real estate professional and materially participate in your rental activities, your rental activities are considered non-passive, and losses can be used to offset other active income. 3. **Net Passive Income**: If you have net passive income (passive income exceeds passive losses), you can use passive losses to offset this income. 4. **Disposition of Passive Activity**: Upon a complete disposition of a passive activity, unused passive losses may be
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