Do passive capital losses get netted with nonpassive capital gains or with passive ordinary income?

I'm completely stuck trying to figure out how to handle some investment losses on my 2025 tax return. I have about $11,000 in passive capital losses from a real estate investment that tanked this year. I also have around $15,000 in nonpassive capital gains from some stocks I sold, plus about $7,500 in passive ordinary income from a small rental property I own. My question is: when I'm doing my taxes, do I net those passive capital losses against my nonpassive capital gains from the stock sales? Or do I net them against the passive ordinary income from my rental? I've tried looking this up but keep getting confused by all the different rules about passive vs nonpassive income and losses. Would really appreciate if someone could explain this in plain English!

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26 comments

Maggie Martinez

•8M

The tax code has specific rules for handling passive activity losses. Passive capital losses are first netted against passive capital gains (if you have any). If you don't have passive capital gains, then passive capital losses are treated like any other capital loss and will offset capital gains regardless of whether those gains are passive or nonpassive. So in your case, your $11,000 in passive capital losses would offset some of your $15,000 nonpassive capital gains from stocks, leaving you with $4,000 in net capital gains. Your passive ordinary income from the rental property is treated separately under the passive activity rules. One important thing to note: if your losses are from a passive activity like your real estate investment, you need to determine if they're truly "capital losses" or if they're "passive activity losses" which have different treatment. True capital losses flow through to your Schedule D regardless of source, while passive activity losses are subject to the passive activity loss limitations.

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Maggie Martinez

•8M

You're mixing up two different concepts. Capital gains and losses (whether passive or nonpassive) are reported on Schedule D and netted together regardless of source - this is governed by capital loss rules. So passive capital losses will offset capital gains regardless of whether those gains are passive or nonpassive. What you're thinking about are passive activity losses (PALs), which are ordinary losses from passive activities. Those can generally only offset passive activity income, and unused amounts are carried forward until you have passive income or dispose of the entire activity. But capital losses from passive activities follow the capital loss rules first, not the passive activity rules.

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Monique Byrd

•8M

I was actually dealing with this exact situation last year and was pulling my hair out trying to figure it out. I found this amazing tool called taxr.ai (https://taxr.ai) that really helped me understand how to handle my passive losses. I uploaded my investment documents and it analyzed them, telling me exactly how to categorize each loss and which forms to use. The thing I learned is that it matters what kind of passive loss you have - whether it's truly a capital loss or just an operating loss from a passive activity. In my case, I had passive capital losses from a failed real estate investment, and taxr.ai confirmed that I could use those to offset my non-passive capital gains from stock sales. The software walks you through the whole calculation step-by-step.

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Monique Byrd

•8M

For K-1 items, taxr.ai is super helpful because it looks at each line item on your K-1 and tells you exactly how to report it. It distinguishes between capital and ordinary items, and separates passive from non-passive items. I had K-1s from two different partnerships and it sorted everything perfectly. As for tax software integration, it doesn't directly file your taxes, but it generates a detailed report showing exactly which forms and which lines each item should go on. I used that report alongside TurboTax and it made the process way smoother. It basically serves as a guide to make sure you're putting everything in the right place in whatever tax software you're using.

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Jackie Martinez

•8M

Just wanted to follow up after trying taxr.ai that someone recommended here. It was incredibly helpful with my complex K-1 situation! The system analyzed my partnership documents and clearly showed which of my passive losses were capital (going on Schedule D) versus which were ordinary (subject to PAL rules). I had been incorrectly netting everything together for years, but the tool showed me that my passive capital losses from the partnership should actually offset my capital gains first, regardless of whether those gains were passive or non-passive. Saved me over $2,000 in taxes that I would have overpaid. Wish I'd known about this years ago!

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Haley Stokes

•8M

If you're still struggling to get clarity on this passive loss situation, I highly recommend using Claimyr (https://claimyr.com) to actually talk to an IRS agent directly. I was in a similar situation last year with complex passive/non-passive income sorting, and after weeks of frustration trying to get through to the IRS myself, I used Claimyr and got connected to an IRS rep in about 20 minutes. The IRS agent walked me through exactly how to handle my passive capital losses and explained that they do indeed offset capital gains regardless of source. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. Instead of waiting on hold for hours or getting disconnected, I actually got to speak with someone who knew the tax code and could answer my specific questions.

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Haley Stokes

•8M

It's not a premium line or anything special like that. Claimyr uses an automated system that navigates the IRS phone tree and waits on hold for you. When they finally get a human on the line, you get a call back to connect with the IRS agent. It's basically just handling the waiting part so you don't have to sit there with a phone to your ear for hours. No, they're definitely not paying off IRS agents! They're just using technology to handle the frustrating hold process. The service just gets you past the hold time - once you're connected, it's a normal conversation with a regular IRS agent who has no idea you used a service to get through. I was skeptical too until I tried it and got through in 20 minutes when I'd previously spent 3+ hours trying on my own.

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Serene Snow

•8M

I need to eat my words and admit I was totally wrong about Claimyr. After dismissing it as BS, I decided to try it anyway because I was desperate to sort out a similar passive loss issue and couldn't get a straight answer online. Got connected to an IRS tax law specialist in about 25 minutes who confirmed exactly what was said above: passive capital losses offset capital gains regardless of whether those gains are passive or nonpassive. They go on Schedule D and follow capital loss rules. The passive activity loss limitations only apply to ordinary income losses from passive activities. The agent even emailed me specific IRS publication references so I could document my position if needed. Saved me hours of research and uncertainty. Consider me converted.

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Issac Nightingale

•8M

This is such a confusing topic! I think part of the issue is that "passive losses" can refer to two different things in tax talk: 1) Capital losses from passive activities (like selling a rental property at a loss) 2) Operating losses from passive activities (like negative cash flow from a rental) The first type follows capital loss rules on Schedule D. The second type follows passive activity loss rules and can only offset passive income, with excess carried forward. At least that's my understanding as a non-professional who's been dealing with this for years. Anyone have a different interpretation?

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Issac Nightingale

•8M

Suspended passive losses from prior years can only offset passive income in current and future years, with one big exception: when you completely dispose of the entire passive activity in a fully taxable transaction. At that point, any remaining suspended losses from that specific activity are freed up and can offset any type of income (active, portfolio, etc). This is one of the rare instances where passive losses can offset non-passive income. You report this on Form 8582 in the year of the complete disposition. It's a nice tax benefit when you exit an investment that's been generating suspended losses for years.

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Vanessa Figueroa

•5M

You don't file a separate form to claim real estate professional status - you just need to maintain detailed records showing you meet the requirements (750+ hours and more than half your working time in real estate). On Schedule E, you'd report your rental activities as non-passive rather than passive. The key thing is documentation. Keep detailed logs of your hours and activities because the IRS scrutinizes real estate professional claims heavily. I'd also recommend making the election to group all your rental properties as one activity if you have multiple properties - it makes the material participation test much easier to meet.

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Ian Armstrong

•4M

This is a really helpful thread! I'm dealing with a similar situation but with a twist - I have passive capital losses from a partnership that went under, plus some passive ordinary losses from rental properties. Based on what everyone's saying here, it sounds like the capital losses go to Schedule D regardless of passive/nonpassive status, but the ordinary rental losses are subject to the PAL rules. One thing I'm still unclear on though - if I have both types of passive losses in the same year, is there a specific order I need to apply them? Like do I use the capital losses first against my gains, then see what's left for the ordinary losses to offset against passive income? Or can I choose which ones to use first for better tax planning? Also, @Vanessa Figueroa, thanks for that tip about grouping rental properties - I have three small rentals and never knew about that election. That could be a game changer for my situation!

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Luca Bianchi

•3M

Great question about the order of applying losses! The tax code actually dictates the order for you - you don't get to choose strategically. Capital losses (whether passive or nonpassive) are netted against capital gains first on Schedule D, following the capital loss ordering rules (short-term against short-term, long-term against long-term, then net short-term against net long-term). This happens before you even get to the passive activity loss calculations. After your capital gains/losses are netted on Schedule D, then you move to Form 8582 for the passive activity loss limitations, which only apply to ordinary income/losses from passive activities. So your passive ordinary losses from rentals would be subject to the PAL rules and can generally only offset passive ordinary income (unless you qualify for the $25,000 rental real estate exception or dispose of the entire activity). The grouping election for rental properties is definitely worth looking into with multiple properties - it can really simplify the material participation requirements!

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Mason Lopez

•3M

This thread has been incredibly enlightening! I'm a tax preparer and see this confusion all the time with clients who have mixed investment portfolios. The key distinction everyone's hitting on is absolutely correct - passive CAPITAL losses follow Schedule D rules and can offset any capital gains, while passive ORDINARY losses are subject to the passive activity limitation rules. One additional point that might help clarify things: when you're looking at your investment documents, make sure you can identify whether a loss is truly a "capital loss" (from the sale or disposition of a capital asset) versus an "ordinary loss" (from operations of a business or rental activity). Partnership K-1s are notorious for mixing these together, and it's crucial to separate them properly. For the original poster's situation with $11,000 in passive capital losses - if these are truly capital losses (like from selling the real estate investment), they absolutely can offset your $15,000 in nonpassive capital gains from stock sales. Your passive ordinary income from the rental stays separate and isn't part of this calculation. Great advice throughout this thread about documentation and the various tools/services available. The IRS publications that specifically address this are Pub 925 (Passive Activity and At-Risk Rules) and Pub 544 (Sales and Other Dispositions of Assets) if anyone wants the official guidance!

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Anna Stewart

•2M

This is exactly the kind of professional insight I was hoping to find! As someone new to dealing with complex investment losses, I really appreciate you breaking down the capital vs ordinary loss distinction. I think that's where a lot of my confusion was coming from. Quick follow-up question - when you mention partnership K-1s mixing these together, is there a specific section or line on the K-1 where I should be looking to identify which losses are capital versus ordinary? I have a K-1 from a real estate partnership and I'm honestly not sure how to categorize some of the losses reported on it. Also, thanks for the publication references! I'll definitely check out Pub 925 and 544 to get the official guidance on this.

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StellarSurfer

•2M

Great question @Anna Stewart! On a partnership K-1, you'll want to look at the specific line items and their codes. Capital gains and losses typically show up on lines 9a-9f (short-term capital gains/losses) and 10a-10f (long-term capital gains/losses). These are clearly marked as capital items. Ordinary losses from the partnership's operations usually appear on line 1 (ordinary business income/loss) and sometimes line 2 (net rental real estate income/loss) depending on the partnership's activities. Section 179 deductions, if any, show up on line 12 with code K. The tricky part is that some partnerships will also report items in the "Other Information" section (lines 11-20) that could be either capital or ordinary depending on their nature. Look for specific codes and descriptions there. If you're still unsure after reviewing the K-1, I'd recommend reaching out to the partnership's tax contact or your tax preparer. Partnership taxation can get complex quickly, and it's worth making sure you're categorizing everything correctly to avoid headaches later!

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Emma Wilson

•13d

This has been such a helpful discussion! I'm dealing with a similar situation and want to make sure I understand this correctly. So if I have passive capital losses from selling a rental property at a loss, those losses go on Schedule D and can offset ANY capital gains I have (whether from stocks, bonds, or other investments), regardless of whether those gains are passive or nonpassive? And then separately, if I have operating losses from my rental properties (like when expenses exceed rental income), those are treated as passive ordinary losses and can only offset passive ordinary income unless I qualify for an exception? I think I've been overthinking this because I kept trying to apply the passive activity rules to ALL losses from passive activities, when really the capital vs ordinary distinction is what matters first. The tax code seems to prioritize the nature of the income/loss (capital vs ordinary) over the source (passive vs nonpassive) when it comes to capital gains and losses. Thanks to everyone who shared their experiences and especially the tax preparer who clarified the K-1 line items - that's going to save me a lot of confusion when I tackle my partnership documents!

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