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It is my understanding that "passive loss rules" prevent the deduction of rental real estate losses.Can you explain this to me? I understand there are also some exceptions.

Passive Loss Rules
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Gary Carter, PhD, MT, CPA
The passive loss rules were enacted in 1986 under Section 469 of the Code to prevent the deduction of so called artificial losses against earned income and portfolio income. The losses disallowed under Section 469 are not lost, but deferred until the passive activity is disposed of or until they can be offset against passive income. Generally, rental losses are per se passive, but there are a couple of exceptions. If you actively participate in your rental activity, you can deduct losses of up to $25,000 per year, if your adjusted gross income (AGI) is $100,000 or less. As your AGI increases, this allowance is phased out at the rate of 50 cents for each dollar of AGI. In other words, the deduction is fully disallowed if your AGI is $150,000 or more. Another exception allows you to treat your rental activity as a business if you qualify as a "real estate professional" and you materially participate in the rental activity. Basically, a real estate professional is someone who works primarily in a profession connected to real estate. There are some mechanical rules that must be met to pass this test.
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