One rental shows a profit and another a loss: how the IRS nets them

The netting rule

IRS Publication 925 says that, generally, the passive activity loss for the tax year is not allowed. The passive activity loss is the excess of your passive activity deductions over your passive activity gross income. That is a combined measure across all your passive activities, not one rental at a time.

So a rental with a profit does help. Its income counts as passive income, and it is netted against losses from your other passive rentals before the passive loss limit applies.

A worked example

Example a made-up landlord has three rentals. House 1 earns $11,000 net. House 2 loses $4,000. House 3 loses $9,000. Total passive income is $11,000 and total passive losses are $13,000. The net result is $11,000 minus $13,000, a $2,000 net loss. Only the $2,000 net loss is subject to the passive loss limit, not the full $13,000.

If the landlord actively participates and income is within the limit, the special allowance of up to $25,000 can allow the whole $2,000. See the $25,000 allowance.

When part of the loss is disallowed

If part of the net passive loss is disallowed, Publication 925 says a ratable portion of the loss from each of your passive activities is disallowed. Each activity's share depends on its loss compared with the total losses from all loss activities. Part VII of Form 8582 figures the ratable portion, according to the publication.

Example the same landlord's net loss is $2,000, and suppose none is allowed this year. Losses came from House 2 ($4,000) and House 3 ($9,000), a total of $13,000. House 2's share is $4,000 divided by $13,000, about 30.8%, and House 3's is about 69.2%. Of the $2,000 disallowed, House 2 carries $615 and House 3 carries $1,385. Check: $615 plus $1,385 is $2,000.

Each property's carryforward then waits as a suspended loss. When you sell that property in a fully taxable sale, the suspended loss attached to it can generally be used, as described in suspended passive rental losses.

Why per-property books matter here

The ratable split only works if you know each property's profit or loss. If one set of books mixes four properties, the preparer has to rebuild each result by hand. Per-property books also give you the number for each carryforward, which you need years later when you sell. The post on one LLC per property with separate books explains why.

• Keep one profit and loss statement for each property.
• Keep last year's Form 8582 and the carryforward by property.
• Keep the sale statement for each property when sold.

When the form is required

With losses and several rentals you usually file Form 8582, unless every condition in the Form 8582 instructions is met, as covered in Form 8582: who must file. Ask your preparer for the carryforward list each year.

This post cites Publication 925 and does not give tax advice. Your facts, including participation and income, decide the result.

How DoorKeeping handles it

DoorKeeping keeps a profit and loss statement per property and a combined portfolio view, so each property's result is ready. Ask Claude or ChatGPT for the year's net income by property, and give it to your preparer, who runs the netting and carryforwards. DoorKeeping does not file Form 8582 and gives no tax advice.

Sources

1. IRS, Publication 925, Passive Activity and At-Risk Rules, read Oct 30, 2026
2. IRS, Instructions for Form 8582, read Oct 30, 2026

Questions

Can a profit on one rental offset a loss on another?

Yes. The passive activity loss is the excess of passive deductions over passive gross income across all your passive activities.

What happens to a disallowed rental loss?

A ratable portion of the loss from each passive activity is disallowed and carried forward, per Publication 925.

Which form shows the split by property?

Publication 925 says to use Part VII of Form 8582 to figure each activity's ratable portion.

Does the $25,000 allowance still apply?

It can, if you actively participate and your income is within the limits. It applies to the net loss.