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Finance Glossary

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Passive Loss


Occurs through investments in limited partnerships that invest in real estate, oil exploration, etc. These investments generate huge accounting losses at the beginning, which pass through the partnership entity to the limited partners. This could be beneficial to those partners who might have a lot of income from other sources and would love to offset that income with these investment losses. Sadly, the IRS has put a stop to that. Passive losses can only be used to offset passive income, i.e., the income that you get from those limited partnership investments.