Income and losses from rental real estate activities have generally been classified as passive, regardless of the amount of participation by the taxpayer. The result is that the losses from these activities can only be deducted against income from other passive activities. They could not be used to offset nonpassive income, such as wages, interest, dividends or certain capital gains.
However, certain developments in the law combined with the advent of Airbnb- and Vrbo-related sectors can result in losses from rental real estate being characterized as nonpassive and, thus, being available to offset nonpassive income. For this to happen, the taxpayer must “materially participate” in the activity, and the activity must not be treated as a rental activity.
