Deducting Rental Losses: The $25,000 Allowance and Its Phaseout
When a rental loss can offset wages: the $25,000 allowance for active participation, the $100,000–$150,000 phaseout and the real estate professional test.
By Seayora Editorial Team · Published · Facts checked · 3 min read
Short answer: Rental activities are generally passive, so a rental loss can only offset passive income. The main exception: if you actively participated, you can deduct up to $25,000 of rental real estate loss against other income. The allowance shrinks by 50% of modified adjusted gross income above $100,000 and is gone at $150,000. A real estate professional who materially participates is not subject to the passive limits at all. A loss you cannot use carries forward.
Key takeaways
- Active participation, such as approving tenants and setting rents, is enough for the $25,000 allowance.
- Between $100,000 and $150,000 of modified AGI, the allowance falls by $1 for every $2 of income.
- Married filing separately: $12,500 if you lived apart all year, nothing if you lived together at any time.
- Disallowed losses are not lost; they carry forward to future years.
Why are rental losses limited?
Rental activities are passive activities even if you materially participate in them, unless you are a real estate professional (IRS Publication 925). A passive loss can generally offset only passive income, and a disallowed loss carries forward to later years until you have passive income or dispose of the activity.
What is the $25,000 special allowance?
If you or your spouse actively participated in a rental real estate activity, you can deduct up to $25,000 of loss from it against your nonpassive income, such as wages. Active participation is a lower bar than material participation. You (with your spouse) must own at least 10% of the property and make management decisions, such as approving new tenants, deciding rental terms and approving expenditures, or arrange for others to provide services such as repairs, in a significant and bona fide sense (IRS Publication 527).
How does the phaseout work?
The $25,000 is reduced by 50% of your modified adjusted gross income above $100,000, so it is gone at $150,000 ($50,000 and $75,000 if married filing separately). Publication 925’s example: a single taxpayer with $120,000 of salary and a $31,000 rental loss loses $10,000 of the allowance (50% of the $20,000 over $100,000), deducts $15,000, and carries the remaining $16,000 to the next year.
| Filing status | Maximum allowance | Phaseout begins | No allowance at |
|---|---|---|---|
| Single, married filing jointly, head of household | $25,000 | $100,000 of modified AGI | $150,000 |
| Married filing separately, lived apart all year | $12,500 | $50,000 | $75,000 |
| Married filing separately, lived together at any time | None | — | — |
Who is a real estate professional?
You qualify if more than half of the personal services you performed in all trades or businesses during the year were in real property trades or businesses in which you materially participated, and you performed more than 750 hours of services in them. A real estate professional who materially participates in a rental reports that rental’s income or loss as nonpassive, on line 43 of Schedule E, and the $25,000 limit does not apply.
Are short-term rentals treated differently?
Yes. Publication 925 says an activity is not a rental activity at all if the average period of customer use is 7 days or less, or 30 days or less with significant personal services. Such an activity is judged by the ordinary material participation tests instead. See short-term and vacation rental tax rules.
Frequently asked questions
Do I need to manage the property myself to get the $25,000 allowance?
No. You need to own at least 10% of the property and make management decisions, such as approving new tenants, deciding rental terms and approving expenditures, in a significant and bona fide sense. Owners who use a property manager often still make those decisions.
What happens to a rental loss I cannot deduct?
It carries forward and can be used against passive income in later years, or when you dispose of your entire interest in the activity.
Does the real estate professional test count hours from my day job?
Your hours in all trades or businesses count toward the comparison. More than half of all your working hours, and more than 750 hours, must be in real property trades or businesses in which you materially participate.
Sources
- Publication 925 (2025), Passive Activity and At-Risk Rules, Internal Revenue Service
- Publication 527 (2025), Residential Rental Property, Internal Revenue Service
How Seayora helps
Property Tax Center: Schedule E by property from the books, with an estimate of how much of a rental loss the $25,000 allowance lets you use.
This article is general information, not tax advice. Tax rules change and your situation is your own, so confirm the treatment with a CPA or enrolled agent before you file.
How we write and check these guides: editorial standards.
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