In general,losses from passive activities may be deducted only to the extent that there is passive income.

This is known as the passive activity loss (PAL) rules, which were introduced under the Tax Reform Act of 1986. The rules stipulate that losses from passive activities (such as rental properties, limited partnerships, and other investments in which the taxpayer is not materially involved) can only be deducted to the extent that there is passive income. If there is no passive income or the loss exceeds the passive income, then any unused losses can generally be carried forward to future years.