The $25,000 Rental Loss Allowance
Rental losses are normally passive and can only offset passive income. A landlord who actively participates and has modified AGI under $100,000 can deduct up to $25,000 a year of rental losses against wages and other income. The allowance shrinks by 50 cents for every dollar of MAGI above $100,000 and is gone at $150,000.
Reviewed by Ebot Mbi, CPA, EA · Last reviewed October 9, 2026
Who it fits
- Landlords with modified AGI under $150,000, and most of all under $100,000
- Owners of at least 10% of the rental who approve tenants, set rents and approve repairs
- Owners with depreciation-heavy properties that show tax losses while cash flowing
- Couples filing jointly with one or two long-term rentals
Who it's not for
- Households with MAGI of $150,000 or more, where the allowance is fully phased out
- Married couples filing separately who lived together at any time during the year, who get no allowance
- Owners who hand every decision to a manager or hold through a limited partnership interest
How it works
Rental real estate is passive by default, so losses generally only offset other passive income. The $25,000 allowance is a statutory exception for individuals who actively participate in the rental.
Active participation is a lower bar than material participation. You must own at least 10% and make management decisions in a real sense: approving tenants, setting rental terms, approving major spending. Using a property manager is allowed if you keep those decisions.
The phase-out is based on modified AGI, which is figured before any passive loss, IRA deduction or taxable Social Security. For every dollar of MAGI above $100,000, the allowance falls by 50 cents. At $150,000, it is zero. These thresholds are not indexed for inflation.
Losses you cannot deduct are not lost. They carry forward and can be used against future passive income or released in full when you sell the property in a taxable sale to an unrelated buyer.
Two other paths sit beside this one: qualifying as a real estate professional, and short-term rentals with an average stay of seven days or less, which are not treated as rental activities under these rules. Each has its own tests.
Illustrative example
Illustrative: a married couple filing jointly with $120,000 of MAGI owns a long-term rental that produces an $18,000 tax loss after depreciation. They actively participate. Assume a 22% marginal rate.
- MAGI above $100,000: $120,000 - $100,000 = $20,000
- Reduction: $20,000 x 50% = $10,000
- Available allowance: $25,000 - $10,000 = $15,000
- Loss deducted this year: $15,000; carried forward: $18,000 - $15,000 = $3,000
- Tax saved this year: $15,000 x 22% = $3,300
About $3,300 of federal income tax saved this year, with $3,000 of loss carried forward for later use.
The rules
| Rule | Citation |
|---|---|
| Individuals who actively participate in rental real estate may deduct up to $25,000 of passive rental losses against nonpassive income. | IRC §469(i)(1)-(2) |
| The allowance is reduced by 50% of modified AGI above $100,000. | IRC §469(i)(3) |
| Active participation requires at least a 10% ownership interest. | IRC §469(i)(6) |
| Disallowed passive losses carry forward and are released on a full taxable disposition. | IRC §469(b), (g) |
Watch-outs
- A raise, bonus or one-time gain can push MAGI past $150,000 and erase the allowance for that year.
- Married filing separately is costly here: $12,500 if you lived apart all year, zero if you lived together at any time.
- Keep records of your management decisions in case active participation is questioned.
- Short-term rental and real estate professional positions are tested on facts and hours; they are not automatic.
What we do
We calculate MAGI and the allowance each year, track carried-forward losses property by property, and time income, depreciation and sales where we can to keep the allowance usable. We file the Form 8582 calculations and keep the history ready for a sale.
Questions
Does my 401(k) contribution lower MAGI for this test?
Pre-tax 401(k) deferrals reduce your wages and so reduce MAGI. That can be a practical way to stay under the phase-out.
What happens to carried-forward losses when I sell?
A full taxable sale to an unrelated party generally releases all suspended losses from that property against any income that year.
Can I use it if the property is in an LLC?
Generally yes, if you own at least 10% and actively participate. A limited partnership interest generally does not qualify.