The tax law allows you to deduct some passive losses--an amount of passive losses exactly equal to your passive income.
If you have only one activity with a loss, the calculation is relatively simple. The loss is allowed up to the amount of income from other passive activities.
The tricky part comes when you have more than one activity and must figure out "how much" of each activity's losses are allowed and how much are disallowed.
The general idea is to allocate a portion of the total allowable loss to an activity in proportion to its share of the total loss.
(In the case of rental activities with active participation, the loss considered is the loss left over after application of the $25,000 special allowance--see Worksheet #4.)