DEFINITION of ‘Passive Loss’
A financial loss within an investment in any trade or business enterprise in which the investor is not a material participant. Passive losses can stem from investments in rental properties or business partnerships. In order to be considered a non-material participant, the investor cannot be continuously and substantially active or involved in the business activity.
Passive losses can be written off only against passive gains. When losses, which can include a loss from the sale of the passive business or property, exceed the income from passive activities, the rest of the loss can be carried forward to the next tax year, provided there is some passive income to write it off against.