The $25,000 Passive Loss Allowance for Rental Real Estate

By Tom, CPA · Updated October 27, 2026

Part of: Rental Property Taxes

TL;DR: If you actively participate in a rental, you can deduct up to $25,000 of rental real estate losses against wages and other nonpassive income. The allowance shrinks by 50 cents for every dollar of modified AGI above $100,000 and is gone at $150,000. Married filing separately gets $12,500 only if you lived apart all year, and $0 otherwise. Unused losses carry forward.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

Your tenant pays the mortgage; the IRS pays for the roof over 27.5 years. The depreciation often turns a cash-positive rental into a tax loss, and then the passive activity rules ask an awkward question: who said you could use that loss?

Rental activities are generally passive under section 469, and passive losses can only offset passive income. Pub. 925 describes the main exception for ordinary landlords: the special allowance for rental real estate with active participation. Up to $25,000 of losses can offset nonpassive income such as wages, subject to an income phaseout. This guide covers the active participation test, the phaseout math, the married filing separately trap, what happens to the disallowed part, and worked examples at three income levels. For the bigger picture, see passive activity loss rules.

CPA Warning Label: The $25,000 allowance has not been raised for inflation since it was created in 1986. Your income has. That is why so many landlords discover the phaseout the hard way.

Active participation test

Active participation is a lighter standard than material participation. Pub. 925 says you may be treated as actively participating if you make management decisions in a significant and bona fide sense, such as:

• Approving new tenants
• Deciding on rental terms
• Approving expenditures
• Similar decisions

Hiring a property manager does not by itself defeat active participation, as long as you still make those decisions. Pub. 925's own example: Stacey advertised and rented the house, collected rents and did or arranged repairs, and actively participated.

Other requirements:

• You (with your spouse) must own at least 10% by value of all interests in the activity throughout the year.
• Only individuals can actively participate. A decedent's estate is treated as actively participating for tax years ending less than two years after death if the decedent would have qualified.
• Limited partners generally are not treated as actively participating, which is why most real estate syndications do not get the allowance (see syndication passive losses).
• A rental with personal use exceeding the greater of 14 days or 10% of rental days is not treated as a passive activity under these rules; the vacation home rules apply instead.
• Short-term rentals with an average stay of 7 days or less are not "rental activities" for section 469, so the $25,000 allowance does not apply to them; material participation decides instead.

$100k-$150k phaseout math

The maximum $25,000 allowance is reduced by 50% of modified adjusted gross income (MAGI) above $100,000. At $150,000 it is zero. These thresholds are fixed in the statute and are not adjusted for inflation.

Formula: allowance = $25,000 minus 50% x (MAGI minus $100,000), but not below zero.

MAGI for this purpose is AGI figured without, among other items listed in Pub. 925: taxable Social Security benefits, deductible IRA contributions, the student loan interest deduction, the deductible part of self-employment tax, passive activity income or loss included on Form 8582, and rental losses allowed because you are a real estate professional. That means a pre-tax 401(k) contribution, which reduces wages and therefore AGI, also lowers MAGI here, while a deductible traditional IRA contribution does not.

The allowance is computed on Form 8582 and applies to your net losses from all actively participated rental real estate combined, after netting with passive income.

Married filing separately trap

For married couples filing separately:

• If you lived apart from your spouse at all times during the year, the maximum allowance is $12,500, reduced by 50% of MAGI over $50,000, reaching zero at $75,000.
• If you lived with your spouse at any time during the year, the allowance is zero. Pub. 925 says you cannot use the special allowance to reduce nonpassive income.

Lavish Larry, who files separately to keep his spouse out of his "creative" deductions, therefore loses the entire allowance if they shared a home for even a day. Filing status choices have consequences beyond the rate tables.

Carryforwards

Losses disallowed by the phaseout are not lost. They become suspended passive losses for that activity, carried forward indefinitely on Form 8582 worksheets. Each year, a suspended loss can be used:

• Against passive income from any source.
• Under the $25,000 allowance in a later year when MAGI is lower.
• In full when you dispose of your entire interest in the activity in a fully taxable transaction to an unrelated party.

Track them by property. See suspended passive losses for how they release. These are different from capital loss carryforwards, which follow their own rules (see capital loss carryforward); a passive loss cannot offset capital gains from stock unless those gains come from passive activities.

Example at three incomes

Illustration: A single landlord actively participates in two long-term rentals with a combined 2026 net loss of $30,000 (mostly depreciation) and has no other passive income.

At $125,000, the landlord could restore part of the allowance by lowering MAGI, for example with pre-tax workplace retirement contributions: an extra $10,000 pre-tax lowers MAGI to $115,000 and raises the allowance to $17,500. That interaction is one reason high savers sometimes get more rental losses than their neighbors with the same salary.

At $160,000, the rental loss does nothing for wages this year. Options include generating passive income (for example, another profitable rental), qualifying for real estate professional status, running a short-term rental with material participation, or simply waiting for a sale. See rental losses for W-2 earners.

Planning around the phaseout

Because the allowance depends on a single year's MAGI, timing matters more than many landlords expect.

• Bunching income. A large bonus, stock sale or Roth conversion in the same year as a big rental loss can push MAGI over $150,000 and wipe out the allowance. Spreading conversions or gains across years can preserve it. Note that capital gains are part of AGI and therefore MAGI.
• Bunching deductions. Big depreciation years, such as the year you buy a property or complete a cost segregation study, are best matched with lower-MAGI years when the allowance is available.
• Pre-tax retirement contributions. As shown above, workplace plan deferrals lower MAGI dollar for dollar.
• Retirement years. Early retirees often have MAGI well under $100,000 before Social Security and required distributions begin. Suspended losses from working years can start flowing through the allowance then, which can make the gap years unusually tax-efficient.
• Two spouses, one return. On a joint return the limit is $25,000 for the couple, not each spouse, and MAGI is combined.

None of these moves is worth making if it costs more elsewhere. A Roth conversion skipped to save a $3,000 rental deduction may be a bad trade; run the full return both ways.

Reporting

Rental income and expenses go on Schedule E. If you have passive losses limited by section 469, you complete Form 8582, and the allowed loss flows back to Schedule E line 22. The Form 8582 instructions provide an exception from filing the form for some taxpayers whose only passive activities are actively participated rentals with total losses of $25,000 or less, MAGI of $100,000 or less, and no prior-year unallowed losses; check the Form 8582 instructions for the full conditions.