Passive Activity Losses
If your losses from passive activities exceed the income generated from those activities in a given year, the excess losses cannot be deducted in that year. Instead, they can be carried forward to offset income in future tax years. The same rule applies to tax credits from passive activities.

Material and Active Participation
A passive activity is a business or trade in which you do not actively participate on a substantial, continuous, and regular basis. Rental activities, including rental real estate, generally fall under passive activities, even if you participate materially. However, if you qualify as a real estate professional, rental real estate activities in which you materially participate are not considered passive. Additionally, there is a limited exception that allows active participation in rental real estate activities to be treated differently from passive activities. The standards for material and active participation, as well as the specific tax rules for publicly traded partnerships (PTPs), are detailed in IRS Publication 925, Passive Activity and At-Risk Rules.

Disposing of an Entire Interest
If you sell or otherwise dispose of your entire interest in a passive activity, any passive losses previously disallowed can be fully deducted in that tax year. However, passive activity credits that were not used in prior years cannot be automatically claimed upon disposal. Instead, you may choose to increase the basis of the credit property by the amount of the unused credit that previously reduced the property’s basis.

Tax Forms for Passive Activities
To report income and losses from passive activities and determine deductible amounts, use Form 8582, Passive Activity Loss Limitations.
For passive activity tax credits, including computing allowable credits and making an election to adjust the basis of credit property, use Form 8582-CR, Passive Activity Credit Limitations.