Are net passive activity losses carried forward to future tax returns to offset future passive activity gains?

Net passive activity losses can indeed be carried forward to future tax returns to offset future passive activity gains. This is an important aspect of the tax treatment of passive activities under the Internal Revenue Code.

The IRS rules designate certain investments or business activities as passive, meaning you do not materially participate in them. If you incur losses from these passive activities, you cannot use those losses to offset ordinary income from wages or other non-passive income. However, the unutilized losses can be rolled forward to future tax years. This allows you to potentially use those losses to offset future income generated from passive activities, effectively lowering your taxable income in those years.

This mechanism is particularly useful for taxpayers who may primarily invest in real estate, limited partnerships, or other passive entities, thereby providing a way to defer tax liability by allowing them to utilize losses against future earnings from similar passive endeavors.