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
Sample Output
See what this feature calculates for you.
Ready to Use Passive Loss Rules?
Get access to this feature and everything else in Real Estate Tax Estimator.