Passive Income vs. Active Participation
Deducting all of the rental expenses and depreciation from the taxpayer's rental income may result in a loss.
Because rental activities are generally considered passive activities, rental losses may not be fully deductible.
Exception for Rental Real Estate with Active Participation
If the taxpayer and the taxpayer's spouse actively participated in a passive rental real estate activity, they can deduct up to $25,000 of loss from the activity from their nonpassive income. This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. The limit is $12,500 for married taxpayers filing separately and living apart for the entire year.
Passive rental activity means receiving income mainly from the use of property rather than for services.
Active participation means making significant management decisions, such as approving rental terms, repairs, expenditures, and new tenants. Taxpayers who use a leasing agent or property manager are still considered active participants if they retain final management rights.
For more information, see Publication 925, Passive Activity and At-Risk Rules.