Passive Loss Rules
Understand how passive activity loss rules affect your ability to deduct rental losses.
How Passive Loss Limitation Works
Rental real estate is classified as a passive activity by the IRS. Losses from passive activities can generally only offset other passive income. However, there is a special $25,000 allowance for active participants in rental real estate — but it phases out as your Modified Adjusted Gross Income (MAGI) rises.
- MAGI ≤ $100,000: Full $25,000 passive loss deduction allowed
- MAGI $100,001–$150,000: Allowance reduced by $0.50 per $1 over $100K
- MAGI > $150,000: No passive loss deduction — losses are suspended
- Suspended losses carry forward and are released when you sell the property
Why This Matters for Your Tax Bill
Many rental properties show a paper loss due to depreciation — even when cash flow is positive. If your MAGI is under $100K, you can deduct up to $25K of that loss against your W-2 or other active income, directly reducing your tax bill. But if your MAGI is over $150K, those losses are suspended until you sell.
- A $10K rental loss at 29% combined rate = $2,900 in tax savings
- The $25K allowance is per taxpayer, not per property
- Real estate professionals (750+ hours) can bypass passive loss limits entirely
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