How to reduce taxes on passive income: losses, credits and timing

By the Tax Field Guide editorial team. Published 2026-10-26. Facts checked 2026-10-26. Related strategies: Purchased Energy Credits, Solar Investment Credits, Accelerated Depreciation, Like-Kind Exchanges, Opportunity Zone Investments.

Education only; not tax, legal or investment advice. Tax rules change, and how they apply depends on your facts. No outcome is guaranteed.

Passive income is the one place where many promoted tax tools actually fit. The same rules that stop passive losses and credits from touching wages let them offset passive income.

What counts as passive income

Under §469, passive activities are trade or business activities in which you do not materially participate, plus most rental activities.¹² Income from those activities is passive income. Portfolio income (interest, dividends, annuities, royalties, and gains on investment property) is not passive income, even though people often call it that.²

Passive income can also be subject to the 3.8% net investment income tax above certain income thresholds.³

Tools that offset passive income

1. Passive losses, including depreciation

Losses from other passive activities offset passive income in the same year. Rental real estate owners often accelerate depreciation with a cost segregation study and 100% bonus depreciation on qualifying components.⁴ Read our cost segregation pitfalls guide first.

2. Passive credits: owned solar or purchased credits

Credits from passive activities, including the solar investment tax credit from equipment you own but do not operate, can offset the tax attributable to passive income.² Individuals can also buy clean energy credits under §6418; the IRS says purchased credits generally offset only passive income tax liability.⁵ See buying transferable solar credits and solar tax equity for individuals. The general business credit limit still applies.⁶

3. Disposing of a passive activity

When you dispose of your entire interest in a passive activity in a fully taxable transaction, its suspended losses generally become deductible.²

Tools for gains (which are usually portfolio, not passive)

1031 exchanges defer gain on real property exchanged for like-kind real property.⁷ See 1031 exchanges.
Qualified Opportunity Funds can defer and, after a holding period, exclude gain. See opportunity zones.

A quick self-check

Is my income passive, or portfolio? Your Schedule E and K-1s show the difference.
Do I have suspended passive losses already (Form 8582)? If so, new passive losses may not add anything.
If I buy a credit, how much of my regular tax is allocable to passive income this year?

Common questions

Are dividends and interest passive income?

No. For the passive activity rules they are portfolio income, which passive losses and passive credits generally cannot offset.

What can offset passive income?

Losses from other passive activities (including depreciation), passive credits such as credits from solar equipment you own but do not operate, and credits individuals buy under §6418, which the IRS says generally offset only passive income tax liability.

Education only; not tax, legal or investment advice. Talk to a qualified professional before acting.

Sources

26 U.S.C. §469, https://www.law.cornell.edu/uscode/text/26/469
IRS Publication 925, Passive Activity and At-Risk Rules, https://www.irs.gov/publications/p925
IRS, Net Investment Income Tax, https://www.irs.gov/individuals/net-investment-income-tax
IRS Notice 2026-11 (100% bonus depreciation, property acquired after Jan. 19, 2025), https://www.irs.gov/pub/irs-drop/n-26-11.pdf
IRS, Elective pay and transferability FAQs: transferability (Q15), https://www.irs.gov/credits-deductions/elective-pay-and-transferability-frequently-asked-questions-transferability
26 U.S.C. §38(c), https://www.law.cornell.edu/uscode/text/26/38
26 U.S.C. §1031, https://www.law.cornell.edu/uscode/text/26/1031

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