26 U.S.C. § 469
Passive activity losses and credits limited
Except as otherwise provided in this section, any loss or credit from an activity which is disallowed under subsection (a) shall be treated as a deduction or credit allocable to such activity in the next taxable year.
Except as provided in paragraph (7), the term “passive activity” includes any rental activity.
The term “passive activity” shall not include any working interest in any oil or gas property which the taxpayer holds directly or through an entity which does not limit the liability of the taxpayer with respect to such interest.
If any taxpayer has any loss for any taxable year from a working interest in any oil or gas property which is treated as a loss which is not from a passive activity, then any net income from such property (or any property the basis of which is determined in whole or in part by reference to the basis of such property) for any succeeding taxable year shall be treated as income of the taxpayer which is not from a passive activity. If the preceding sentence applies to the net income from any property for any taxable year, any credits allowable under subpart B (other than section 27) or D of part IV of subchapter A for such taxable year which are attributable to such property shall be treated as credits not from a passive activity to the extent the amount of such credits does not exceed the regular tax liability of the taxpayer for the taxable year which is allocable to such net income.
Paragraphs (2) and (3) shall be applied without regard to whether or not the taxpayer materially participates in the activity.
For purposes of paragraph (1)(A), the term “trade or business” includes any activity involving research or experimentation (within the meaning of section 174).
For purposes of this paragraph, the term “real property trade or business” means any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.
In the case of a closely held C corporation, the requirements of subparagraph (B) shall be treated as met for any taxable year if more than 50 percent of the gross receipts of such corporation for such taxable year are derived from real property trades or businesses in which the corporation materially participates.
For purposes of subparagraph (B), personal services performed as an employee shall not be treated as performed in real property trades or businesses. The preceding sentence shall not apply if such employee is a 5-percent owner (as defined in section 416(i)(1)(B)) in the employer.
For purposes of subparagraph (A), any income, gain, or loss which is attributable to an investment of working capital shall be treated as not derived in the ordinary course of a trade or business.
Earned income (within the meaning of section 911(d)(2)(A)) shall not be taken into account in computing the income or loss from a passive activity for any taxable year.
For purposes of paragraphs (1) and (2), income from dividends shall be reduced by the amount of any dividends received deduction under section 243 or 245.
If a taxpayer ceases for any taxable year to be a closely held C corporation or personal service corporation, this section shall continue to apply to losses and credits to which this section applied for any preceding taxable year in the same manner as if such taxpayer continued to be a closely held C corporation or personal service corporation, whichever is applicable.
If the taxpayer and the person acquiring the interest bear a relationship to each other described in section 267(b) or section 707(b)(1), then subparagraph (A) shall not apply to any loss of the taxpayer until the taxable year in which such interest is acquired (in a transaction described in subparagraph (A)) by another person who does not bear such a relationship to the taxpayer.
To the extent provided in regulations, income or gain from the activity for preceding taxable years shall be taken into account under subparagraph (A)(ii) for the taxable year to the extent necessary to prevent the avoidance of this section.
In the case of an installment sale of an entire interest in an activity to which section 453 applies, paragraph (1) shall apply to the portion of such losses for each taxable year which bears the same ratio to all such losses as the gain recognized on such sale during such taxable year bears to the gross profit from such sale (realized or to be realized when payment is completed).
Except as provided in regulations, no interest in a limited partnership as a limited partner shall be treated as an interest with respect to which a taxpayer materially participates.
A taxpayer shall be treated as materially participating in any farming activity for a taxable year if paragraph (4) or (5) of section 2032A(b) would cause the requirements of section 2032A(b)(1)(C)(ii) to be met with respect to real property used in such activity if such taxpayer had died during the taxable year.
In determining whether a taxpayer materially participates, the participation of the spouse of the taxpayer shall be taken into account.
In the case of any natural person, subsection (a) shall not apply to that portion of the passive activity loss or the deduction equivalent (within the meaning of subsection (j)(5)) of the passive activity credit for any taxable year which is attributable to all rental real estate activities with respect to which such individual actively participated in such taxable year (and if any portion of such loss or credit arose in another taxable year, in such other taxable year).
The aggregate amount to which paragraph (1) applies for any taxable year shall not exceed $25,000.
In the case of any taxpayer, the $25,000 amount under paragraph (2) shall be reduced (but not below zero) by 50 percent of the amount by which the adjusted gross income of the taxpayer for the taxable year exceeds $100,000.
In the case of any portion of the passive activity credit for any taxable year which is attributable to the rehabilitation credit determined under section 47, subparagraph (A) shall be applied by substituting “$200,000” for “$100,000”.
Subparagraph (A) shall not apply to any portion of the passive activity credit for any taxable year which is attributable to any credit determined under section 42.
In the case of taxable years of an estate ending less than 2 years after the date of the death of the decedent, this subsection shall apply to all rental real estate activities with respect to which such decedent actively participated before his death.
For purposes of subparagraph (A), the $25,000 amount under paragraph (2) shall be reduced by the amount of the exemption under paragraph (1) (without regard to paragraph (3)) allowable to the surviving spouse of the decedent for the taxable year ending with or within the taxable year of the estate.
An individual shall not be treated as actively participating with respect to any interest in any rental real estate activity for any period if, at any time during such period, such interest (including any interest of the spouse of the individual) is less than 10 percent (by value) of all interests in such activity.
Except as provided in regulations, no interest as a limited partner in a limited partnership shall be treated as an interest with respect to which the taxpayer actively participates.
In determining whether a taxpayer actively participates, the participation of the spouse of the taxpayer shall be taken into account.
The term “closely held C corporation” means any C corporation described in section 465(a)(1)(B).
The term “regular tax liability” has the meaning given such term by section 26(b).
The passive activity loss and the passive activity credit (and the $25,000 amount under subsection (i)) shall be allocated to activities, and within activities, on a pro rata basis in such manner as the Secretary may prescribe.
The deduction equivalent of credits from a passive activity for any taxable year is the amount which (if allowed as a deduction) would reduce the regular tax liability for such taxable year by an amount equal to such credits.
The passive activity loss of a taxpayer shall be computed without regard to qualified residence interest (within the meaning of section 163(h)(3)).
The term “rental activity” means any activity where payments are principally for the use of tangible property.
For purposes of determining gain or loss from a disposition of any property to which subsection (g)(1) applies, the transferor may elect to increase the basis of such property immediately before the transfer by an amount equal to the portion of any unused credit allowable under this chapter which reduced the basis of such property for the taxable year in which such credit arose. If the taxpayer elects the application of this paragraph, such portion of the passive activity credit of such taxpayer shall not be allowed for any taxable year.
If a passive activity involves the use of a dwelling unit to which section 280A(c)(5) applies for any taxable year, any income, deduction, gain, or loss allocable to such use shall not be taken into account for purposes of this section for such taxable year.
Except as provided in regulations, all members of an affiliated group which files a consolidated return shall be treated as 1 corporation.
This section shall be applied separately with respect to items attributable to each publicly traded partnership (and subsection (i) shall not apply with respect to items attributable to any such partnership). The preceding sentence shall not apply to any credit determined under section 42, or any rehabilitation credit determined under section 47, attributable to a publicly traded partnership to the extent the amount of any such credits exceeds the regular tax liability attributable to income from such partnership.
For purposes of subsection (g), a taxpayer shall not be treated as having disposed of his entire interest in an activity of a publicly traded partnership until he disposes of his entire interest in such partnership.
For purposes of this section, a regulated investment company (as defined in section 851) holding an interest in a qualified publicly traded partnership (as defined in section 851(h)) shall be treated as a taxpayer described in subsection (a)(2) with respect to items attributable to such interest.
2021—Subsec. (i)(3)(E)(ii). Pub. L. 117–2 substituted “85(c), 135, and 137” for “135 and 137”.
2020—Subsec. (i)(3)(E)(iii). Pub. L. 116–260 struck out “222,” after “221,”.
2018—Subsecs. (c)(3)(B), (d)(2)(A)(ii). Pub. L. 115–141, § 401(d)(1)(D)(ii), substituted “27” for “27(a)”.
Subsec. (i)(3)(C). Pub. L. 115–141, § 401(d)(5)(B)(i), redesignated subpar. (D) as (C) and struck out former subpar. (C). Prior to amendment, text of subpar. (C) read as follows: “Subparagraph (A) shall not apply to any portion of the passive activity loss for any taxable year which is attributable to the commercial revitalization deduction under section 1400I.”
Subsec. (i)(3)(D). Pub. L. 115–141, § 401(d)(5)(B)(i), (ii), redesignated subpar. (E) as (D) and amended it generally. Prior to amendment, subpar. related to ordering rules to reflect exceptions and separate phase-outs. Former subpar. (D) redesignated (C).
Subsec. (i)(3)(E), (F). Pub. L. 115–141, § 401(d)(5)(B)(i), redesignated subpar. (F) as (E). Former subpar. (E) redesignated (D).
Subsec. (i)(6)(B). Pub. L. 115–141, § 401(d)(5)(B)(iii)(I), substituted “or rehabilitation credit” for “, rehabilitation credit, or commercial revitalization deduction” in heading.
Subsec. (i)(6)(B)(iii). Pub. L. 115–141, § 401(d)(5)(B)(iii)(II)–(IV), struck out cl. (iii) which read as follows: “any deduction under section 1400I (relating to commercial revitalization deduction).”
2017—Subsec. (i)(3)(F)(iii). Pub. L. 115–97, § 14202(b)(3), substituted “222, and 250” for “and 222”.
Pub. L. 115–97, § 13305(b)(1), struck out “199,” after “sections”.
2014—Subsec. (e)(4). Pub. L. 113–295, § 221(a)(41)(G), struck out “, 244,” after “section 243”.
Subsec. (m). Pub. L. 113–295, § 221(a)(60)(A), struck out subsec. (m) which related to a phase-in of disallowance of losses and credits for interest held before the date of enactment of the Tax Reform Act of 1986.
2004—Subsec. (i)(3)(F)(iii). Pub. L. 108–357, § 102(d)(5), inserted “199,” before “219,”.
Subsec. (k)(4). Pub. L. 108–357, § 331(g), added par. (4).
2002—Subsec. (i)(3)(E)(ii) to (iv). Pub. L. 107–147 added cls. (ii) to (iv) and struck out former cls. (ii) to (iv) which read as follows:
“(ii) second to the portion of the passive activity credit to which subparagraph (B) or (D) does not apply,
“(iii) third to the portion of such credit to which subparagraph (B) applies,
“(iv) fourth to the portion of such loss to which subparagraph (C) applies, and”.
2001—Subsec. (i)(3)(F)(iii). Pub. L. 107–16 substituted “, 221, and 222” for “and 221”.
2000—Subsec. (i)(3)(C) to (F). Pub. L. 106–554, § 1(a)(7) [title I, § 101(b)(1), (2)], added subpar. (C), redesignated former subpars. (C) to (E) as (D) to (F), respectively, and generally amended heading and text of subpar. (E), as redesignated. Prior to amendment, text read as follows: “If subparagraph (B) or (C) applies for any taxable year, paragraph (1) shall be applied—
“(i) first to the passive activity loss,
“(ii) second to the portion of the passive activity credit to which subparagraph (B) or (C) does not apply,
“(iii) third to the portion of such credit to which subparagraph (B) applies, and
“(iv) then to the portion of such credit to which subparagraph (C) applies.”
Subsec. (i)(6)(B). Pub. L. 106–554, § 1(a)(7) [title I, § 101(b)(3)(B)], substituted “, rehabilitation credit, or commercial revitalization deduction” for “or rehabilitation credit” in heading.
Subsec. (i)(6)(B)(iii). Pub. L. 106–554, § 1(a)(7) [title I, § 101(b)(3)(A)], added cl. (iii).
1998—Subsec. (i)(3)(E)(iii). Pub. L. 105–277 amended cl. (iii) generally. Prior to amendment, cl. (iii) read as follows: “any amount allowable as a deduction under section 219, and”.
1996—Subsec. (c)(3)(B). Pub. L. 104–188, § 1704(d)(1), inserted at end “If the preceding sentence applies to the net income from any property for any taxable year, any credits allowable under subpart B (other than section 27(a)) or D of part IV of subchapter A for such taxable year which are attributable to such property shall be treated as credits not from a passive activity to the extent the amount of such credits does not exceed the regular tax liability of the taxpayer for the taxable year which is allocable to such net income.”
Subsec. (g)(1)(A). Pub. L. 104–188, § 1704(e)(1), reenacted heading without change and amended text generally. Prior to amendment, text read as follows: “If all gain or loss realized on such disposition is recognized, the excess of—
“(i) the sum of—
“(I) any loss from such activity for such taxable year (determined after application of subsection (b)), plus
“(II) any loss realized on such disposition, over
“(ii) net income or gain for such taxable year from all passive activities (determined without regard to losses described in clause (i)),
shall be treated as a loss which is not from a passive activity.”
Subsec. (i)(3)(E)(ii). Pub. L. 104–188, § 1807(c)(4), amended cl. (ii) generally. Prior to amendment, cl. (ii) read as follows: “the amount excludable from gross income under section 135,”.
1993—Subsec. (c)(2). Pub. L. 103–66, § 13143(b)(1), substituted “Except as provided in paragraph (7), the” for “The”.
Subsec. (c)(7). Pub. L. 103–66, § 13143(a), added par. (7).
Subsec. (i)(3)(E)(iv). Pub. L. 103–66, § 13143(b)(2), inserted “or any loss allowable by reason of subsection (c)(7)” after “loss”.
1990—Subsec. (i)(3)(B), (6)(B)(ii). Pub. L. 101–508, § 11813(b)(16)(A), substituted “rehabilitation credit determined under section 47” for “rehabilitation investment credit (within the meaning of section 48(o))”.
Subsec. (k)(1). Pub. L. 101–508, § 11813(b)(16)(B), substituted “rehabilitation credit determined under section 47” for “rehabilitation investment credit (within the meaning of section 48(o))”.
Subsec. (m)(3)(A). Pub. L. 101–508, § 11704(a)(6), substituted “pre-enactment” for “preenactment”.
1989—Subsec. (i)(3)(B), (C). Pub. L. 101–239 added subpars. (B) and (C) and struck out former subpars. (B) and (C) which read as follows:
“(B)
“(C)
“(i) first to the passive activity loss,
“(ii) second to the portion of the passive activity credit to which subparagraph (B) does not apply, and
“(iii) then to the portion of such credit to which subparagraph (B) applies.”
Subsec. (i)(3)(D), (E). Pub. L. 101–239 added subpar. (D) and redesignated former subpar. (D) as (E).
1988—Subsec. (e)(1)(A)(ii). Pub. L. 100–647, § 1005(a)(1), inserted “not derived in the ordinary course of a trade or business which is” after “gain or loss”.
Subsec. (g)(1)(A). Pub. L. 100–647, § 1005(a)(2)(A), amended subpar. (A) generally. Prior to amendment, subpar. (A) read as follows: “If all gain or loss realized on such disposition is recognized, any loss from such activity which has not previously been allowed as a deduction (and in the case of a passive activity for the taxable year, any loss realized on such disposition) shall not be treated as a passive activity loss and shall be allowable as a deduction against income in the following order:
“(i) Income or gain from the passive activity for the taxable year (including any gain recognized on the disposition).
“(ii) Net income or gain for the taxable year from all passive activities.
“(iii) Any other income or gain.”
Subsec. (g)(1)(C). Pub. L. 100–647, § 1005(a)(2)(B), substituted “Income from prior years” for “Coordination with section 1211” in heading and amended text generally. Prior to amendment, text read as follows: “In the case of any loss realized on the disposition of an interest in a passive activity, section 1211 shall be applied before subparagraph (A) is applied.”
Subsec. (g)(2)(A). Pub. L. 100–647, § 1005(a)(3), substituted “paragraph (1)(A)” for “paragraph (1)” and “to losses described in paragraph (1)(A)” for “to such losses”.
Subsec. (g)(3). Pub. L. 100–647, § 1005(a)(4), substituted “(realized or to be realized” for “realized (or to be realized)” and “is completed)” for “is completed”.
Subsec. (h)(4). Pub. L. 100–647, § 1005(a)(5), inserted “only” before “if”.
Subsec. (i)(1). Pub. L. 100–647, § 1005(a)(6), substituted “in such taxable year (and if any portion of such loss or credit arose in another taxable year, in such other taxable year)” for “in the taxable year in which such portion of such loss or credit arose”.
Subsec. (i)(3)(D). Pub. L. 100–647, § 6009(c)(3), added cl. (ii) and redesignated former cls. (ii) and (iii) as (iii) and (iv), respectively.
Subsec. (i)(6)(C). Pub. L. 100–647, § 1005(a)(7), substituted “Except as provided in regulations, no” for “No”.
Subsec. (j)(6)(A). Pub. L. 100–647, § 1005(a)(8), inserted “with respect to which a deduction has not been allowed by reason of subsection (a)” after “to such interest”.
Subsec. (j)(10), (11). Pub. L. 100–647, § 1005(a)(9), added pars. (10) and (11).
Subsec. (j)(12). Pub. L. 100–647, § 1005(a)(11), added par. (12).
Subsec. (k)(3). Pub. L. 100–647, § 2004(g), added par. (3).
Subsec. (m). Pub. L. 100–647, § 1005(a)(12), substituted “interest” for “interests” in heading.
Subsec. (m)(1). Pub. L. 100–647, § 1005(a)(12), added par. (1) and struck out former par. (1) which read as follows: “In the case of any passive activity loss or credit for any taxable year beginning in calendar years 1987 through 1990 which—
“(A) is attributable to a pre-enactment interest, but
“(B) is not attributable to a carryforward to such taxable year of any loss or credit which was disallowed under this section for a preceding taxable year,
there shall be disallowed under subsection (a) only the applicable percentage of the amount which (but for this subsection) would have been disallowed under subsection (a) for such taxable year.”
Subsec. (m)(2). Pub. L. 100–647, § 1005(a)(12), added par. (2) and struck out former par. (2) which resulted in substituting “65”, “40”, “20”, and “10” for “35”, “60”, “80”, and “90”, respectively, in second column.
Subsec. (m)(3)(A). Pub. L. 100–647, § 1005(a)(12), added subpar. (A) and struck out former subpar. (A) which read as follows: “The portion of the passive activity loss for any taxable year which is attributable to pre-enactment interests shall be equal to the lesser of—
“(i) the passive activity loss for such taxable year, or
“(ii) the passive activity loss for such taxable year determined by taking into account only pre-enactment interests.
For purposes of this subparagraph, the deduction equivalent (within the meaning of subsection (j)(5)) of a passive activity credit shall be taken into account.”
1987—Subsecs. (k) to (m). Pub. L. 100–203 added subsec. (k) and redesignated former subsecs. (k) and (l) as (l) and (m), respectively.
Amendment by Pub. L. 117–2 applicable to taxable years beginning after
Amendment by Pub. L. 116–260 applicable to taxable years beginning after
Amendment by section 13305(b)(1) of Pub. L. 115–97 applicable to taxable years beginning after
Amendment by section 14202(b)(3) of Pub. L. 115–97 applicable to taxable years beginning after
Amendment by section 221(a)(41)(G) of Pub. L. 113–295 not applicable to preferred stock issued before
Except as otherwise provided in section 221(a) of Pub. L. 113–295, amendment by Pub. L. 113–295 effective
Amendment by section 102(d)(5) of Pub. L. 108–357 applicable to taxable years beginning after
Pub. L. 108–357, title III, § 331(h),
Amendment by Pub. L. 107–147 effective as if included in the provisions of the Community Renewal Tax Relief Act of 2000 [H.R. 5662, as enacted by Pub. L. 106–554], to which such amendment relates, see section 412(e) of Pub. L. 107–147, set out as a note under section 151 of this title.
Amendment by Pub. L. 107–16 applicable to payments made in taxable years beginning after
Amendment by Pub. L. 105–277 effective as if included in the provision of the Taxpayer Relief Act of 1997, Pub. L. 105–34, to which such amendment relates, see section 4003(l) of Pub. L. 105–277, set out as a note under section 86 of this title.
Pub. L. 104–188, title XVII, § 1704(d)(2),
Pub. L. 104–188, title XVII, § 1704(e)(2),
Amendment by section 1807(c)(4) of Pub. L. 104–188 applicable to taxable years beginning after
Pub. L. 103–66, title XIII, § 13143(c),
Amendment by section 11813(b)(16) of Pub. L. 101–508 applicable to property placed in service after
Pub. L. 101–239, title VII, § 7109(b),
Amendment by section 1005(a)(1)–(9), (11), (12) of Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title.
Amendment by section 2004(g) of Pub. L. 100–647 effective, except as otherwise provided, as if included in the provisions of the Revenue Act of 1987, Pub. L. 100–203, title X, to which such amendment relates, see section 2004(u) of Pub. L. 100–647, set out as a note under section 56 of this title.
Amendment by section 6009(c)(3) of Pub. L. 100–647 applicable to taxable years beginning after
Amendment by Pub. L. 100–203 effective as if included in the amendments made by section 501 of the Tax Reform Act of 1986, Pub. L. 99–514, see section 10212(c) of Pub. L. 100–203, set out as a note under section 58 of this title.
Pub. L. 99–514, title V, § 501(c),
Amendment by section 401(d)(5)(B)(i)–(iii) of Pub. L. 115–141 not applicable to certain qualified community assets acquired, wages paid or incurred, qualified revitalization buildings placed in service, or property acquired before
For provisions that nothing in amendment by Pub. L. 115–141 be construed to affect treatment of certain transactions occurring, property acquired, or items of income, loss, deduction, or credit taken into account prior to
For provisions that nothing in amendment by section 11813(b)(16) of Pub. L. 101–508 be construed to affect treatment of certain transactions occurring, property acquired, or items of income, loss, deduction, or credit taken into account prior to
Pub. L. 100–647, title I, § 1005(c)(11),
Pub. L. 99–514, title V, § 502,
[Pub. L. 99–509, title VIII, § 8073(b),