What the allowance does
Under IRC § 469(i), if you actively participate in a rental activity and your modified adjusted gross income (MAGI) is below $100,000, you may deduct up to $25,000 of net rental losses against non-passive income such as wages or business income. Active participation is a low bar — it means you make management decisions (approving tenants, setting rents, authorizing repairs) even if a property manager does the day-to-day work.
The allowance phases out ratably between $100,000 and $150,000 MAGI. At $125,000 MAGI you can deduct up to $12,500; at $150,000 and above the allowance is zero and all rental losses become suspended passive losses.
How suspended losses work
Losses disallowed by the passive activity rules don't vanish — they suspend and carry forward indefinitely. They can offset future passive income from any source, or they release in full in the year you sell the property in a fully taxable transaction. Married couples filing separately each face a reduced $12,500 allowance (phasing out $50,000–$75,000 MAGI).
Active participation vs. material participation
Active participation is easier to meet than material participation. It requires only that you own at least 10% of the property and participate in a significant bona fide sense. Material participation — which removes the property from the passive category entirely — requires meeting one of seven IRS tests, including spending more than 500 hours per year in the activity. Most part-time landlords qualify for active participation but not material participation.
Frequently asked questions
What income level phases out the $25,000 rental loss allowance?
The allowance phases out ratably between $100,000 and $150,000 MAGI for single filers and married filing jointly. Above $150,000, the allowance is zero.
Can I deduct rental losses if I use a property manager?
Yes. Active participation doesn't require hands-on management — making major decisions like approving leases and authorizing large repairs is enough.
What happens to suspended rental losses when I sell?
Suspended passive losses from that property are released in full in the year of a complete, taxable sale and can offset any type of income in that year.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.