IRS Jargon: Passive Activity Loss and At Risk Rule
The IRS created 3 income categories: activity income (work), passive activity income (real estate and royalties), and investment and portfolio income (stocks dividends and interest income). The passive activity loss rules were created to prevent you from offseting income in one category with losses in another.
According to Nolo, the rule was created in the 80s because some taxpayers invested in real estate partnernships setup for the purpose of generating losses that would offset all other income.
At risk rule is yet another rule that would prevent one to declare more losses than the value of the property that generates them.
You do not have to be concerned with this rule if your properties generate profit every year. If your properties generate losses, the loss can be carried backward or forward to other tax years.
