Colibri Real Estate 30-Hour Alabama Post License Practice Exam

To what do "passive loss" rules typically apply?

1. Rental homes

2. Primary residences

3. Commercial properties

4. Vacation homes

The correct answer is: Rental homes

"Passive loss" rules typically apply to rental homes because these rules are part of the Internal Revenue Code and are focused on limitations regarding losses from activities in which the taxpayer does not materially participate. Rental activities are generally considered passive unless the owner is a real estate professional. This means that any losses incurred from rental homes often cannot be used to offset other types of income, under certain conditions. In contrast, primary residences and vacation homes are generally treated differently for tax purposes, as the sale of these properties can have implications with regard to capital gains, and and homes not used primarily as a source of income do not usually fall under the passive loss rules. Commercial properties may have different considerations as well, focusing instead on active engagement in the business rather than the passive nature of rental income. Thus, the correlation of passive loss rules specifically aligns with rental homes as they primarily generate income without active management by the owner.