Rental losses and the $25,000 passive loss allowance

Updated 2026-11-09 · Lintel

Depreciation often turns a rental that pays you cash into a tax loss. Whether that loss reduces tax on your salary depends mainly on two things: whether you actively participate, and your modified adjusted gross income (MAGI).

The default rule: rental losses are passive

For tax purposes, renting out property is a passive activity by default. Passive losses can normally offset only passive income, such as profit from another rental. They can't offset wages or business income. The exception that matters to most small landlords is the special allowance.

The $25,000 special allowance

If you actively participate in the rental, you can deduct up to $25,000 of rental losses per year against non-passive income. Active participation is a low bar. You must:

own at least 10% of the property, and
make management decisions in a significant and bona fide sense: approving tenants, setting rent, approving repairs and expenditures.

Using a property manager doesn't disqualify you, as long as you make those decisions yourself.

The MAGI phase-out

The allowance shrinks by 50 cents for every dollar of MAGI above $100,000 and disappears at $150,000. These numbers are not indexed for inflation.

MAGI	Maximum allowance
$100,000 or less	$25,000
$110,000	$20,000
$120,000	$15,000
$130,000	$10,000
$140,000	$5,000
$150,000 or more	$0

Married filing separately: if you lived apart all year, the allowance is $12,500, phasing out between $50,000 and $75,000 MAGI. If you lived together at any time during the year, it is zero.

Worked example

Dana earns a $120,000 salary (MAGI $120,000) and owns one rental. Rent was $18,000; expenses were $14,500; depreciation was $7,600. Schedule E shows a loss of $4,100.

Allowance at $120,000 MAGI: $25,000 − 50% × $20,000 = $15,000.
The $4,100 loss is under $15,000, so all of it offsets Dana's salary this year.

If Dana's MAGI were $160,000, the allowance would be zero. The $4,100 would be suspended, not lost.

Try your own numbers: the free rental loss allowance calculator runs this math with your MAGI and filing status.

Suspended losses carry forward

Disallowed passive losses carry forward indefinitely. They can be used in a later year when you have passive income or when your MAGI drops. When you sell the property in a fully taxable sale to an unrelated buyer, all suspended losses from that activity are released and become fully deductible. Keep the Form 8582 worksheets every year so the carryforward is never lost.

Exceptions worth knowing

Real estate professionals. If more than half of your working time and more than 750 hours a year are spent in real property businesses in which you materially participate, your rentals can be non-passive. Most people with a full-time job elsewhere don't qualify.
Short-term rentals. If the average guest stay is 7 days or less, the activity generally isn't treated as a “rental activity” under these rules at all. Different tests apply. Ask a preparer before assuming either way.

Where the numbers go

Each property's income or loss is calculated on Schedule E. If you have a net rental loss, the passive activity limits are applied on Form 8582, and only the allowed portion flows to Form 1040. Your preparer needs a correct per-property net figure to start from, and that figure includes depreciation.

Landlord Ledger gives you that per-property figure. The Schedule E sheet totals income, expenses and depreciation for each rental, so you and your preparer can see at a glance whether there is a loss to work with.

Get Landlord Ledger — $12 Free depreciation calculator

Sources: IRS Publication 925 (Passive Activity and At-Risk Rules); Instructions for Form 8582; Publication 527 (Residential Rental Property). General information, not tax advice.