b. Passive Income & Losses

Passive Income is income that is earned in an activity in which the taxpayer does NOT materially participate…meaning they are not very involved in the business generating the income. Rental real estate is a passive activity unless it can be proven otherwise.

Passive Income is taxed at Ordinary Income Tax Rates.

Passive Losses can only be used to offset other Passive Income.

• If you have a passive activity (a rental property for example) and this activity produces a $10,000 loss during the tax year. This loss is only currently helpful if you have Passive Income from another source (another rental property perhaps).

There exceptions to this treatment:

If you can prove you are a real estate professional, then your rental income is not considered passive.

If you earn less than $100,000 from all sources, then you may reclassify up to $25,000 of rental losses to be considred non-passive.

Read the following articles for more detailed information:

http://www.smartmoney.com/personal-finance/taxes/tax-rules-for-losses-on-rental-real-estate/

http://www.irs.gov/businesses/small/article/0,,id=146326,00.html