Posted in Finance, Accounting and Economics Terms, Total Reads: 64
Definition: Passive Loss
Passive loss is the loss incurred from a rental property or from a business in which a person is not directly associated. Earlier, people used passive loss scheme as tax shelter from unprofitable business. By investing in unprofitable business mostly in real estate, due to depreciation and other deduction people used to get tax shield in their passive income generated.
A passive income/loss can be generated in two ways:
1. Income/Losses generated from real estate investment
2. Income/Losses generated from a business, in which there is no direct involvement of an individual or can be considered as a side business.
A non-passive Income/loss is the loss incurred from a business in which tax payer is directly involved or actively participates. A business with fixed salaries, interest or dividends from investment, pensions etc. comes under non passive income/loss
Example - Aman working as a full time employee in a company ABC and earning a salary of Rs 70,000. He has invested in a partnership (a travel agency), offering taxi and car rental service, fully managed by other partners .The travel agency is going into losses. Here for Aman, the salary getting from ABC is non passive income whereas the losses incurred from travel agency are passive losses