Passive Loss Law and Legal Definition

Passive loss is a financial loss incurred through business transactions associated with rental property, limited partnership, or other enterprise in which the person is not directly or actively involved. For example, salary or wages is not a passive activity, since the investor is actively engaged in the process of earning those forms of income. However, a silent partner in a partnership business has no managerial control and no participation in the operation of the business can be treated as passive activity. Generally, passive loss is considered as grounds for legitimate tax breaks. The taxation rules limit the amount of passive loss; a person can deduct to the total of his/her other income from passive activities during the tax period.