Passive Loss Deductions and Why You Should Rethink Your Investments
By Bethany K. Lusby, CPA, MST
Before 1986, it wasn't uncommon for someone to invest in a business or rental property that was designed to lose money. The logic behind this move: the tax benefits received from the investment far outweighed any loss that occurred. These "tax shelters" allowed investors to deduct the losses they incurred from other income they earned. In 1986, the story changed when Congress enacted the passive activity loss (PAL) rules, which limited an investor's ability to offset their income with rental or business losses.