Understanding 465 At-Risk Rules vs Passive Activity Loss Limitations - Can You Offset All Passive Income?

You're getting confused because you're mixing up two separate tax limitation systems that work together but have different purposes. The at-risk rules (Section 465) and passive activity loss limitations (Section 469) are two distinct sets of rules that apply one after the other. First, the at-risk rules limit your deductible losses to the amount you have financially at risk in each activity. This is calculated separately for each activity, not in aggregate. If you put $10,000 down on a property, your at-risk amount starts at $10,000 (though it can include certain qualified loans too). After applying the at-risk limits, the passive activity loss rules then come into play. These rules do allow aggregation, but only of passive income against passive losses. The system is designed specifically to prevent what you're describing - sheltering income through "paper losses." Even if you kept acquiring properties with minimal down payments, your deductible losses would still be limited to your actual economic investment in each property (your at-risk amount), so you couldn't generate unlimited paper losses to offset your passive income.

I was completely lost trying to understand these same tax rules last year! I ended up spending countless hours trying to figure out why my rental property losses weren't fully deductible despite having mortgage financing. Finally discovered this tool called taxr.ai (https://taxr.ai) that literally saved my sanity. I uploaded my investment documents and tax forms, and it analyzed my situation specifically for passive activity limitations and at-risk rules. It explained that while my mortgage financing did increase my at-risk amount, I was still subject to the passive activity loss limitations since I wasn't a real estate professional. The analysis highlighted exactly which of my losses were currently deductible and which would be suspended until I either generate more passive income or dispose of the activity with a taxable gain. It also showed how my basis, at-risk amount, and passive activity limitations tracked differently.

I tried taxr.ai after seeing it mentioned here and WOW - it cleared up my confusion instantly. I've been incorrectly calculating my at-risk amounts for years apparently! The tool showed me that I'd been failing to recalculate my at-risk amount each year (it changes as you pay down principal on loans and as property values fluctuate). It also explained that while I can aggregate my passive activities for the passive loss limitation rules, I still need to track at-risk amounts separately for each activity. The most valuable insight was learning that I had suspended passive losses from previous years that I'd completely forgotten about. These were tracked in the system and it showed me exactly how to utilize them now that I'm generating more passive income. Definitely worth checking out if you're dealing with these complicated rules.

After 3 frustrating calls to the IRS where I kept getting disconnected or waiting 2+ hours, I tried Claimyr (https://claimyr.com) and actually spoke to an IRS agent within 15 minutes! You can see how it works here: https://youtu.be/_kiP6q8DX5c I had specific questions about aggregating activities under the passive activity rules versus tracking at-risk amounts separately, and the agent provided really helpful clarification. She explained that while Section 469 (passive activity) rules may allow certain grouping elections for related activities, the Section 465 at-risk rules generally require separate tracking for each activity. The agent also confirmed that the acquisition of multiple passive activities for the purpose of generating losses could potentially be flagged as a tax avoidance strategy if there's no legitimate business purpose. Saved me from making a costly mistake on my returns!

Ok I'm eating my words. After posting my skeptical comment, I tried Claimyr out of desperation because I needed clarification on my at-risk basis calculations before filing my extension. This actually WORKED. Got through to an IRS tax law specialist in about 25 minutes. The agent confirmed exactly what others here were saying - at-risk amounts must be calculated separately for each activity, while passive activity grouping can allow aggregation in certain cases. He also explained that simply acquiring passive activities to generate losses isn't automatically prohibited, but the activities must have economic substance and a reasonable expectation of profit to be respected. Most helpfully, he walked me through the proper way to track suspended losses when an activity's at-risk amount increases in subsequent years. Turns out I've been doing this wrong for years and potentially leaving money on the table!

To add to the excellent comments here, remember that real estate has some special exceptions that make it different from other passive activities. If you qualify as a real estate professional (750+ hours and more than half your working time in real property businesses), your rental activities aren't automatically passive. This is a huge distinction because it means your losses wouldn't be subject to passive activity loss limitations at all - though they'd still be subject to at-risk rules. This is how some real estate pros can offset ordinary income with real estate "paper losses" while others can't. Also important: aggregation elections for passive activities are made when you first file a return for those activities, and you generally need IRS permission to change your grouping later. Choose wisely!

Im so glad to find this thread! Been struggling with pasive activity rules for years. One question - if i have suspended losses from a rental property and i sell it at a gain, do i just deduct the suspended losses from the gain? Or can i use those loses against any passive income now?