My combined income exceeds $150,000. I own one rental property which showed passive losses of $8,000 (couldn't rent the house for several months). I also own a second rental property which had passive income of $9,000. I am an "active participant" in both rentals, but not a "material participant" (i.e. not a real estate professional).

Turbotax computes on Form 1040 that I have $9,000 in rental income and I get taxed on this. While I know that I can't apply any passive losses against ordinary income, why doesn't Turbotax apply the passive losses of $8,000 against the passive income of $9,000, leaving me with net passive income of $1,000 (which I believe is the correct amount that should be indicated on my Form 1040).

In other words, am I incorrect in stating that PASSIVE LOSSES should always offset other PASSIVE INCOME, and that active participation and income levels come into play only when determining whether up to $25,000 in PASSIVE LOSSES can offset ORDINARY INCOME?

If I am wrong, can someone please explain to help me understand. Thanks in advance for any input on this.