Passive loss included in NOL may be carried back.

AuthorPorter, Jack
PositionNet operating loss - Brief Article

An individual has a net operating loss (NOL) if net business losses exceed net business income for a tax year. While negative adjusted gross income (AGI) may indicate that an NOL exists, it is necessary to apply Sec. 172 and its accompanying regulations to determine the amount, if any, of an NOL that is available for carryback and/or carryover. The types of losses and deductions that typically make up NOLs for individuals include rental losses, losses from a sole proprietorship, net losses from the disposition of business property and employee business expenses. The NOL may consist of items, such as rental losses, that also are passive activity losses. This can occur if a taxpayer actively participates in a rental real estate activity and his modified AGI is less than $ 150,000 for the tax year. The losses from that activity, including previously disallowed losses, are then allowed up to $25,000 (under Sec. 469(i)) and thus are included in the NOL. This means that otherwise passive losses, up to $25,000, may be carried back as NOLs to years in which they were previously disallowed under the passive loss rules.

This result is supported by the staff of the joint Committee's General Explanation of the Tax Reform Act of 1986 (at 222):

In the case of the 25,000 allowance for passive losses from rental real estate activities in which an individual...

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