Do you own investment real estate—say, an apartment building—that you rent out to tenants? Real estate can be a valuable and reliable source of income. Of course, the rental income is subject to tax, but the resulting tax liability may be offset by deductible expenses. In some cases, you might even qualify for a loss.
However, there is another wrinkle in the tax law. The loss may be disallowed under the passive activity loss (PAL) rules.