Publication 550 |
2000 Tax Year |
Limits on Deductions
Your deductions for investment expenses may be limited by:
- The at-risk rules,
- The passive activity loss limits,
- The limit on investment interest, or
- The 2% limit on certain miscellaneous itemized deductions.
The at-risk rules and passive activity rules are explained briefly
in this section. The limit on investment interest is explained later
in this chapter under Interest Expenses. The 2% limit is
explained later in this chapter under Expenses of Producing
Income.
At-risk rules.
Special at-risk rules apply to most income-producing activities.
These rules limit the amount of loss you can deduct to the amount you
risk losing in the activity. Generally, this is the amount of cash and
the adjusted basis of property you contribute to the activity. It also
includes money you borrow for use in the activity if you are
personally liable for repayment or if you use property not used in the
activity as security for the loan. For more information, see
Publication 925.
Passive activity losses and credits.
The amount of losses and tax credits you can claim from passive
activities is limited. Generally, you are allowed to deduct passive
activity losses only up to the amount of your passive activity income.
Also, you can use credits from passive activities only against tax on
the income from passive activities. There are exceptions for certain
activities, such as rental real estate activities.
Passive activity.
A passive activity generally is any activity involving the conduct
of any trade or business in which you do not materially participate
and any rental activity. However, if you are involved in renting real
estate, the activity is not a passive activity if both of the
following are true.
- More than one-half of the personal services you perform
during the year in all trades or businesses are performed in real
property trades or businesses in which you materially
participate.
- You perform more than 750 hours of services during the year
in real property trades or businesses in which you materially
participate.
The term trade or business generally means any
activity that involves the conduct of a trade or business, is
conducted in anticipation of starting a trade or business, or involves
certain research or experimental expenditures. However, it does not
include rental activities or certain activities treated as incidental
to holding property for investment.
You are considered to materially participate in an activity if you
are involved on a regular, continuous, and substantial basis in the
operations of the activity.
Other income (nonpassive income).
Generally, you can use losses from passive activities only to
offset income from passive activities. You generally cannot use
passive activity losses to offset your other income, such as your
wages or your portfolio income. Portfolio income includes
gross income from interest, dividends, annuities, or royalties that is
not derived in the ordinary course of a trade or business. It also
includes gains or losses (not derived in the ordinary course of a
trade or business) from the sale or trade of property (other than an
interest in a passive activity) producing portfolio income or held for
investment. This includes capital gain distributions from mutual funds
and real estate investment trusts.
You cannot use passive activity losses to offset Alaska Permanent
Fund dividends.
Expenses.
Do not include in the computation of your passive activity income
or loss:
- Expenses (other than interest) that are clearly and directly
allocable to your portfolio income, or
- Interest expense properly allocable to portfolio income.
However, this interest and other expenses may be subject to
other limits. These limits are explained in the rest of this chapter. Additional information.
For more information about determining and reporting income and
losses from passive activities, see Publication 925.
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