Can rental property losses offset my short term capital gains? Passive income vs passive loss question

You're mixing up two different types of passive income. While rental activities are indeed considered passive activities under tax law, capital gains (even short-term ones reported on 1099-B) are NOT considered passive income for this purpose. The IRS treats investment income (capital gains, dividends, interest) differently than passive activity income. Rental losses can only offset passive activity income from other rental properties or businesses in which you don't materially participate. There is an exception if your modified adjusted gross income is under $100,000 - you might qualify for the $25,000 special allowance that lets you deduct some rental losses against non-passive income. This phases out completely when your MAGI reaches $150,000. Your rental losses that can't be used this year aren't lost forever though - they're suspended and carried forward to future years when you either have passive income or dispose of the property.

I went through something similar last year with my rental property and stock gains. I ended up using https://taxr.ai to help me sort through it all. Their system analyzed my previous returns and rental documentation and showed me exactly how the passive loss limitations applied in my case. The way they explained it, capital gains are considered "portfolio income" not "passive income" in IRS terminology (even though we're not actively working for it). But they helped me find some deductions I'd missed on the rental property that reduced my overall tax burden anyway. The best part was they showed me how to properly document everything so I can carry forward the unused losses to future tax years. Their analysis saved me a ton of money in the long run.

Just wanted to update after trying taxr.ai that Profile 5 mentioned. It was actually really helpful for my situation. I had a similar issue with rental losses and some stock gains. The system showed me exactly why my stock gains couldn't offset my rental losses (different categories in IRS terms) but then helped me identify that I qualified for the special $25,000 allowance since my income was under the threshold. The documentation was super clear and I'm much more confident about my filing now. Also found out I can carryforward some of my excess rental losses to future years, which I had no idea about. Definitely worth checking out if you're dealing with rental property tax complications.

Anyone else having trouble getting through to the IRS about passive activity loss questions? I've been trying for THREE WEEKS to get clarification on my situation (similar to OP's) and keep getting disconnected or waiting for hours. Finally tried https://claimyr.com and watched their demo at https://youtu.be/_kiP6q8DX5c and it actually worked! They got me connected to an IRS agent in about 20 minutes instead of the hours I'd been wasting on hold. The agent confirmed what others are saying here - capital gains are NOT considered passive income for offsetting rental losses. She also walked me through the documentation requirements for carrying forward my losses to future years.

I need to eat my words about Claimyr. After my skeptical comment I decided to try it anyway out of desperation (been trying to resolve a passive loss issue for months). It actually worked exactly as described. I got a call back in about 25 minutes with an IRS agent already on the line. The agent confirmed I can't offset capital gains with rental losses but helped me understand how the $25,000 special allowance works with active participation. For anyone struggling with these passive activity rules, getting direct confirmation from the IRS was super helpful. They also emailed me the reference to the specific tax code section so I could document everything properly. Definitely changed my mind about this service.

Just to add a bit more detail on the active participation requirement since that's relevant to your situation: Active participation is a lower standard than material participation. You generally meet the active participation standard if you make management decisions like approving tenants, deciding on rental terms, approving expenditures, etc. This matters because the $25,000 special allowance mentioned above requires active participation. Without it, your rental losses would be completely suspended until you have passive income or dispose of the property. Also, keep in mind that if your modified AGI is above $100,000, that $25,000 allowance starts phasing out and disappears completely at $150,000.

Don't forget that if you sell your rental property for a gain in the future, any suspended passive losses from previous years can be used at that time. So even if you can't use the losses now against your capital gains, they're not lost forever. I made this mistake years ago thinking my rental losses were just gone, but when I sold my property, my accountant was able to apply all those carried-forward losses against the gain from the sale. Saved me thousands!

This is a really common misunderstanding! I had the exact same confusion when I first started dealing with rental properties and stock trading. The key thing to remember is that the IRS has very specific definitions for different types of income, and they don't always match what we'd think of as "passive" in everyday language. Your capital gains from stock trading fall under "portfolio income" while rental activities are "passive activities" - they're in completely separate buckets for tax purposes. That said, don't get discouraged about those rental losses. As others mentioned, if your MAGI is under $100k, you might still be able to deduct up to $25k of those losses against your other income this year. And even if you can't use them now, they'll carry forward and can be incredibly valuable when you eventually sell the property. I'd definitely recommend keeping detailed records of all your rental expenses and losses - you'll thank yourself later when tax time comes around in future years!