8538 / To what extent is the deductibility of interest limited by the application of the passive activity loss rules?
A passive activity is generally an activity that involves the conduct of a trade or business in which the taxpayer does not materially participate, or any rental activity.1 Generally, the deductibility of passive expenses is limited to the amount of the taxpayer’s passive income for the year. The excess, passive loss, is not deductible. Instead, it is carried over to subsequent tax years for potential deductibility against passive income generated in those years. The same rules apply to the deductibility of interest related to a passive activity. As a result, to the extent that otherwise deductible interest is related to a passive activity, some or all of the interest deductions that are allocated to those passive activities may be disallowed.2 See Q 8010 to Q 8704 for a detailed discussion of the passive loss rules.