The 1986 tax code introduced the Passive Activity Loss (PAL) rules, which aimed to curb the use of tax shelters by wealthy individuals. Before 1986, many taxpayers could use losses from passive activities (like real estate investments where they weren’t actively involved) to offset other types of income, reducing their tax liability. The new rules limited the ability to deduct these losses, significantly changing the landscape of tax planning and real estate investing.
You can read more about Passive activities here