Under what condition can passive activity losses be used to offset income?

Passive activity losses can offset income in specific scenarios defined by tax regulations. The correct choice reflects the understanding that passive activity losses can be utilized to offset passive activity income. This often includes rental income or income from a business in which the taxpayer does not materially participate. Moreover, if a taxpayer sells the passive activity, any accumulated passive losses can be used to offset the gains from that sale, allowing for tax relief.

This aligns with the purpose of the passive activity loss rules, which aim to limit the deduction of losses from activities in which a taxpayer is not significantly involved, thus preventing taxpayers from using such losses to shelter other forms of income.

In contrast, the other options do not accurately describe the conditions under which passive activity losses can be utilized. Nonpassive activity income encompasses different types of income not limited to passive activities, thus making option A insufficient. Limited use of passive losses against wages or ordinary income does not match tax rules, making B and D unapplicable as well.