What it is:
A passive loss is a financial loss from rental property, limitedor other activities in which the investor is not materially involved.
How it works (Example):
When an investor buys shares in a rental property, for example, in which he or she is not actively involved in the operations, it is considered a passive investment. An investor can take a similar role in a company through a passive role as a limited partner.
Claims for passive losses may be made to the U.S. Internal Revenue Service using Form 8582, Passive Activity Loss Limitations.
Why it Matters:
A passive loss may be declared by the owner of the rental property or the limited partner, subject to his or her proportional share in the partnership. This loss may be declared and claimed against passive income on the investor's tax return. Passive income does not include wages or dividends, but does include income from passive investments. It is important to note that under U.S. tax rules, passive losses may be carried forward and used to offset passive income in future years from the same passive investments.