Kingsfield · Research · Tax

Can a taxpayer deduct losses from a passive activity against wages or portfolio income under Section 469?

Published 2026-06-23 · U.S. federal law

Section 469 disallows the current deduction of a passive activity loss: losses from passive activities can offset only passive activity income, not wages or portfolio income.

The answer

The disallowance

26 U.S.C. § 469(a) provides that a passive activity loss is not allowed as a deduction for the taxable year. A passive activity loss is the amount by which the aggregate losses from all passive activities exceed the aggregate income from all passive activities, so the loss is suspended rather than deducted against active or portfolio income.

Suspension, not forfeiture

Disallowed losses are not lost. A passive activity loss disallowed for the year is treated as a deduction allocable to the activity in the next taxable year, carrying forward until passive income absorbs it or the activity is disposed of.

The judged input

What the AI drafted

Submitted to the judge

This is an excerpt from a draft client tax opinion letter — the kind of work product a lawyer generates with a legal-AI drafting tool, then has to stand behind. Kingsfield does not write it; it rules on the citations the model put in it. This draft cites two authorities; one of them is wrong.

AI draft excerpt — client tax opinion letter

The Company's limited partner holds an interest in a rental real estate venture in which the partner does not materially participate. Under 26 U.S.C. § 469(a), the passive activity loss from that venture is not allowed as a deduction for the year and may offset only income from passive activities, not the partner's salary or portfolio income. We note that this loss limitation is imposed by 26 U.S.C. § 465, which caps the deduction of passive activity losses to passive activity income. The disallowed amount carries forward to later years.

The judge ruled on every citation as the draft used it — it accepted 26 U.S.C. § 469(a) and rejected 26 U.S.C. § 465. Here is why.

The verdict

How Kingsfield ruled

Ruled 2026-06-23

Each citation in the draft above was submitted to the Kingsfield judge and ruled against the primary-law corpus — Accept, Reject, or Inconclusive, per citation. These are live verdicts, not editorial. Each card shows the claim the draft made and the verbatim authority the verdict was rendered against.

Accept26 U.S.C. § 469(a)

The draft claimed: A passive activity loss for the taxable year is not allowed as a deduction; the passive activity loss is the amount by which the aggregate losses from all passive activities exceed the aggregate income from all passive activities.

“§ 469(a) If for any taxable year the taxpayer is described in paragraph (2), neither—”

Cite found; proposition supported by the cited text.

Reject26 U.S.C. § 465

The draft claimed: Section 465 is the provision that limits a taxpayer's passive activity loss to passive activity income, disallowing passive losses in excess of passive income.

Cite found, but the cited text does not support the claim. 26 U.S.C. 465 is the at-risk limitation, which caps deductible losses to the amount the taxpayer has at risk in the activity; the passive activity loss limitation keyed to passive income is at 26 U.S.C. 469. Regenerate with the correct authority.

Run your own work through the judge

Kingsfield rules on every citation, quote, and proposition your AI produces, against the primary law we cover. Accept, Reject, or Inconclusive, per citation, with a signed Audit Capsule.

Connect the Judge See the architecture

This page is legal information, not legal advice, and does not create an attorney-client relationship. The draft shown is an illustration of a typical AI answer; verdicts reflect the cited authority in the Kingsfield corpus as of the ruling date shown above.