When might an active investor use passive tax losses in the context of real estate investments?

An active investor can utilize passive tax losses primarily when they have other passive income to offset. Passive activities generally refer to investments that do not involve active participation, such as rental real estate, where the investor is not materially involved in the day-to-day operations. When an active investor has generated passive losses from these real estate investments, they can use those losses to reduce their taxable income from other passive sources.

For instance, if an investor owns multiple properties and one property generates a loss while another investment generates a passive income, the losses from the underperforming property can lower the overall taxable income from the profitable investment. This strategy is beneficial as it allows the investor to effectively manage their tax liability while making the most of their investment portfolio.

It is important to note that while passive losses can offset passive income, they cannot be used to offset active income, which would restrict their application. Therefore, having other passive income to utilize these losses effectively is a critical condition for active investors.