Passive Activity Loss Rules for Landlords, Explained

Many new landlords are surprised when a rental shows a loss on paper but their tax bill barely moves. The reason is the passive activity loss rules. They limit when a loss from a rental can be used against other income, such as wages or business profit. This guide explains the idea in plain English. The rules and dollar figures can change, so confirm current details on IRS.gov or with a CPA.

What “passive” means

The IRS sorts income into categories. Generally, a business in which you do not materially participate is passive, and rental activity is generally treated as passive no matter how much time you spend on it. The main source is IRS Publication 925, Passive Activity and At-Risk Rules.

The practical effect: losses from passive activities can generally be used only against income from passive activities. If your rentals lose money in a year and you have no other passive income, the loss is usually not deductible against your paycheck right away.

Suspended losses are not lost

A loss you cannot use this year is generally “suspended” and carried forward. It can be used in a later year when you have passive income, or when you dispose of your entire interest in the activity in a fully taxable transaction to a buyer who is not related to you. So the rules mostly delay a deduction rather than erase it.

This is one reason good records matter. Carryforwards are tracked year to year, and you will want a clean history. See rental record keeping.

The special allowance for active participation

Publication 925 describes an exception for many small landlords. If you actively participate in your rental, you may be able to deduct a limited amount of rental loss against other income. Active participation is a lower bar than material participation. It generally means you make management decisions in a meaningful way, such as approving tenants, setting rent, and approving repairs. Hiring a property manager does not automatically disqualify you if you still make those decisions. There is also an ownership requirement: you (together with your spouse) generally must own at least 10% of the activity. Check the Publication 925 details.

The allowance phases out as your income rises. Per the 2025 edition of Publication 925, the allowance is up to $25,000. It is reduced by 50 cents for each dollar of modified adjusted gross income (MAGI) above $100,000, so it disappears at $150,000. Married people filing separately get a smaller allowance (up to $12,500, phasing out between $50,000 and $75,000 of MAGI) only if they lived apart for the entire year. If you lived with your spouse at any time during the year and file separately, the allowance is generally not available at all. These dollar amounts come from Internal Revenue Code section 469 and are not adjusted for inflation, but check the current edition for the rules that apply to you.

A worked example

These numbers are round and made up to show the mechanics. They are not tax advice, and the allowance and phase-out are simplified here.

• If the allowance applies in full because you actively participate and your income is below the phase-out range, you may be able to deduct the $6,000 against other income.
• If your income is within the phase-out range, the allowance is reduced, and only part of the $6,000 may be deductible. For example, at $140,000 of MAGI the allowance drops to $5,000, so $1,000 would be suspended.
• If your income is above the phase-out range ($150,000 or more for most filers), the allowance is eliminated. With no other passive income, the full $6,000 is suspended and carried forward.
• Next year, suppose the rental shows a $4,000 profit. The suspended loss can generally be used against that profit first, so the taxable result may be $0 and $2,000 remains suspended.

You figure all this on Form 8582, Passive Activity Loss Limitations, which you file with your return when it applies.

Real estate professionals

A different rule applies to people who meet the IRS tests to be treated as real estate professionals. In that case, rental activity may not be treated as passive, but the tests are demanding and closely examined. Publication 925 requires, among other things, that more than half of your personal services for the year be in real property trades or businesses in which you materially participate, and more than 750 hours of services in those businesses. You must also materially participate in the rental activity itself. This is not a status you get by owning several rentals. If you think you may qualify, talk to a CPA before claiming it, and keep a detailed time log.

Other limits that can apply

The passive rules are not the only gate. Losses may also be limited by the at-risk rules and by basis limits, particularly if you own through a partnership or S corporation. See landlord LLC and legal structure for how ownership choices affect reporting.

Publication 925 also covers special rules for short-term rentals (for example, if the average guest stay is 7 days or less, the activity generally is not treated as a rental activity at all) and for rentals you also use personally. If your rental is not a standard long-term lease, ask a professional which rules apply.

What happens when you sell

When you sell a rental in a fully taxable transaction, suspended losses from that property can generally be released. Tax on the sale itself works separately, and depreciation affects it. Our guide on selling a rental property covers the gain side.

Next steps

Look at last year’s return and see whether a Form 8582 was filed and whether any suspended losses are carrying forward. Gather your rental income and expenses using the Schedule E guide, and review the landlord tax deductions overview with your preparer. Ask whether you meet active participation, what your MAGI looks like for the current year, and whether you should plan for the allowance phasing out. A short conversation before year end is far cheaper than a surprise at filing time.

Related guides

• Short-Term vs Long-Term Rental: Which Is Right for Your Property?