Until recently, business losses were heavily favored by the tax code. As long as they were not considered to be passive losses, business losses could be used to offset any type of income, including business income, wages, and portfolio income. P.L. 115-97 (commonly known as the Tax Cuts and Jobs Act, or TCJA), which was signed into law on Dec. 22, 2017, introduced a new concept under which business losses cannot be used to offset certain types of income. This change has significant consequences for many owners of rental real estate.

Background

Even prior to the enactment of the TCJA, the passive loss rules of Internal Revenue Code (IRC) Section 469 provided a limitation on the ability of a taxpayer to use losses from a passive activity to offset non-passive income (e.g., salary or portfolio income). However, although rental real estate is generally a per se passive activity, an owner of rental real estate generally can avoid the passive loss limitations if he qualifies as a real estate professional (i.e., at least half of his business activities are performed in real estate businesses in which he materially participates, and such services amount to at least 750 hours per year). Prior to the TCJA, losses from rental real estate could be used to offset other types of income if not subject to the passive loss limitations.

New Limitation on Deductions