Which of the following statements about losses from rental activities is correct?

• A. Losses from rental activities are always allowed in full each tax year.
• B. Losses from rental activities can only be deducted if the taxpayer is a corporation.
• C. Losses from rental activities are never deductible under any circumstances.
• D. Losses from rental activities are generally subject to passive activity loss limitations and may not be fully deductible each tax year.

Answer: (D)

Verified step by step guidance

1. Understand the concept of passive activity loss limitations: Passive activities are business or rental activities in which the taxpayer does not materially participate. Losses from these activities are generally subject to limitations under tax laws.
2. Recognize that rental activities are typically classified as passive activities unless the taxpayer qualifies as a real estate professional or materially participates in the activity.
3. Learn that passive activity losses can only be deducted against passive activity income. If the losses exceed the income, they are generally carried forward to future tax years.
4. Note that there are exceptions to the passive activity loss limitations, such as the special \$25,000 allowance for active participation in rental real estate, subject to income thresholds.
5. Conclude that losses from rental activities are not always fully deductible each tax year due to these limitations, and the deductibility depends on the taxpayer's specific circumstances and compliance with tax rules.