Can you deduct a rental property loss against your other income?
Sometimes. Rental real estate is generally a passive activity, so a loss usually offsets only passive income, but if you actively participate you may deduct up to $25,000 of it against wages and other income. That allowance shrinks once your modified adjusted gross income passes $100,000 and is gone at $150,000.
Why rental losses are limited
The IRS treats rental real estate as a passive activity. Under the passive activity rules in Publication 925, losses from passive activities can generally be used only against income from passive activities. A paper loss on a building, often created by depreciation, does not automatically reduce the tax on your paycheck.
There are two main ways around that limit: the $25,000 special allowance for owners who actively participate, and the real estate professional rules. Everything else carries forward.
The $25,000 special allowance
Publication 925 says that if you or your spouse actively participated in a passive rental real estate activity, you can deduct up to $25,000 of loss from it against nonpassive income. Active participation is a lower bar than material participation. Two things matter:
- Ownership: your interest, including your spouse's, must be at least 10% by value of all interests in the activity for the whole year.
- Decisions: Publication 527 says making management decisions, such as approving new tenants or approving expenditures, counts. You can use a manager and still participate this way.
The income phase-out
The allowance depends on your modified adjusted gross income (MAGI), which for this purpose is your adjusted gross income figured without certain items, such as taxable Social Security, IRA deductions and passive activity income or loss. Publication 925 sets these limits:
| Filing status and MAGI | Maximum allowance |
|---|---|
| Single or joint, MAGI $100,000 or less | $25,000 |
| Single or joint, MAGI between $100,000 and $150,000 | $25,000 minus half of MAGI over $100,000 |
| Single or joint, MAGI $150,000 or more | $0 |
| Married filing separately, lived apart all year | $12,500, phasing out between $50,000 and $75,000 |
| Married filing separately, lived together at any time | $0 |
Example a made-up owner files jointly with MAGI of $120,000. The allowance is $25,000 minus half of the $20,000 over $100,000, so $25,000 minus $10,000 is $15,000. Their two buildings show a combined loss of $18,000 after depreciation. They can deduct $15,000 against their wages this year, and the other $3,000 carries forward.
What happens to the loss you cannot use
A disallowed loss is not lost. Publication 925 says disallowed deductions are allocated among your activities for the next tax year, and they can offset passive income later or be used when your income drops into the allowance range. You track them on Form 8582, which the Schedule E instructions say you may need to complete to figure the loss to enter on line 22.
When you sell, Publication 925 says unused passive losses are generally allowed in full in the year you dispose of your entire interest, as long as the sale is fully taxable and the buyer is not related to you. A building with years of suspended losses can therefore produce a large deduction in the year it is sold.
Example a made-up owner has $41,000 of suspended losses on a six unit building after ten years. They sell the whole building to an unrelated buyer in a fully taxable sale. The $41,000, plus that year's operating loss, is generally deductible in the year of sale.
The real estate professional exception
Owners who work in real estate full time may escape the passive limits entirely. Publication 925 says 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 participate, and you performed more than 750 hours of those services. Someone with a full-time job outside real estate rarely meets the first test. The rules are detailed, so this is a question for your tax preparer.
How DoorKeeping handles it
DoorKeeping keeps one set of books per property, with expense accounts mapped to Schedule E lines, so you can see each building's profit or loss before depreciation at any time by asking your AI app. That makes it easier to estimate early in the year whether a loss is coming. Depreciation, MAGI and Form 8582 are your tax preparer's work; DoorKeeping does not file returns or give tax advice.
Sources
- IRS, Publication 925, Passive Activity and At-Risk Rules, read Oct 29, 2026
- IRS, Publication 527, Residential Rental Property, read Oct 29, 2026
- IRS, Instructions for Schedule E (Form 1040), 2025, read Oct 29, 2026
Questions
- Can I deduct rental losses if I make over $150,000?
- Generally not against wages, unless you qualify as a real estate professional. The loss carries forward and can offset passive income later or be used when you sell the property.
- Do I actively participate if I hire a property manager?
- You can. The IRS says making management decisions such as approving tenants and approving expenditures counts, as long as you own at least 10%.
- What form tracks suspended passive losses?
- Form 8582, Passive Activity Loss Limitations. Your tax preparer carries the unused amounts from year to year on it.