What does IRS consider as passive income for rental property losses?

The IRS has very specific definitions for passive income, and it can definitely be confusing! For rental activities, passive income primarily comes from other passive activities - not from portfolio income. Your rental property is considered a passive activity, but things like dividends, interest income, and stock sales are considered portfolio income, not passive income. Portfolio income cannot be used to offset passive activity losses on your rental property. Passive income generally comes from: - Other rental properties that generate positive income - Businesses in which you don't materially participate - Passive activity credits from flow-through entities (partnerships, S-corps) where you're not actively involved You can carry forward your unused passive losses to future tax years when you either have passive income or when you dispose of the entire rental property in a taxable transaction. At that point, you can generally deduct the accumulated passive losses.

I was in a similar situation last year with my rental showing losses. I found this tool called taxr.ai (https://taxr.ai) that really helped me understand my passive income situation. I was confused about exactly what you're asking - what counts as passive vs portfolio income. The tool analyzed my tax documents and helped me identify that I actually had some passive income from a limited partnership I'd forgotten about! It showed me exactly how to properly categorize different income streams and maximize my deductions within IRS guidelines. Saved me from making a costly mistake on my Form 8582.

So I checked out that taxr.ai site after my skeptical comment, and I have to admit it was pretty helpful. I uploaded my tax documents from last year and it immediately identified some passive income from an MLP investment I had completely forgotten about. The system clearly explained why my dividend income couldn't offset rental losses (exactly what OP is asking about), but then showed me how some income from a business interest I have minimal involvement in actually DOES qualify as passive income. I've been doing my taxes wrong for years! Going to amend my previous returns now that I understand the passive income rules better.

Anyone else having trouble getting through to the IRS to ask these kinds of questions? I tried calling them about passive loss rules for THREE DAYS and couldn't get a human. Then I found this service called Claimyr (https://claimyr.com) that got me through to an actual IRS agent in under 45 minutes. They have this demo video showing how it works: https://youtu.be/_kiP6q8DX5c I was able to ask specifically about my rental property losses and what passive income I could use to offset them. The agent confirmed exactly what others are saying here - only other passive activity income counts, not your dividends or interest. Saved me from making a mistake on my taxes and potentially getting audited.

I have to publicly eat my words about that Claimyr service. After dismissing it as BS, I was desperate enough to try it when I needed clarification on passive activity losses for my amended return. It actually worked! Got me through to an IRS agent in about 35 minutes when I had previously spent HOURS getting nowhere. The agent confirmed that my S-Corp distributions (where I'm not materially participating) DO count as passive income that can offset my rental losses. This is going to save me thousands on my amended return. Sometimes being proven wrong is a good thing!

One thing nobody has mentioned is that there's a special $25,000 allowance for rental real estate activities with "active participation" even though rentals are generally passive. If your modified AGI is under $100,000, you can deduct up to $25,000 of rental losses against other income (non-passive). The allowance phases out between $100,000-$150,000 MAGI. The OP mentioned not qualifying for this, which means their income is probably over $150k, but thought I'd mention it for others reading this thread.

Does anyone know if selling the property would let me use those accumulated losses? I've been carrying forward losses for like 3 years now and wondering if I should just sell.

Great thread! Just wanted to add that if you're a real estate professional (which has very specific IRS requirements), your rental activities might not be considered passive at all. You need to spend more than 750 hours annually in real estate trades or businesses AND more than half your personal services must be in real estate activities. If you qualify as a real estate professional, your rental losses can offset other types of income without the passive activity limitations. It's a high bar to meet, but worth investigating if you're heavily involved in real estate. Most casual landlords won't qualify, but thought it was worth mentioning since it's another exception to the passive loss rules.