Are rental losses limited?

Two limits, in a fixed order

If you have a loss from rental real estate, Publication 527 says two sets of rules may limit what you can report on Schedule E, and you consider them in this order. First come the at-risk rules, which apply only if there is investment in the activity for which you are not at risk, and only for real property placed in service after 1986. Second are the passive activity limits. A separate excess business loss limitation, figured on Form 461, applies to losses from all noncorporate trades or businesses, and any limit from it is added back to income on Form 1040 and treated as a net operating loss carried forward, not reflected on Schedule E.

At-risk rules

You may be subject to the at-risk rules if you have a loss from an activity carried on as a trade or business or for the production of income, and amounts invested in the activity for which you are not fully at risk. In most cases, a loss is allowed only to the extent of the total amount you have at risk at the end of the tax year. You are at risk to the extent of the cash and adjusted basis of other property you contributed, plus certain amounts borrowed for use in the activity. A loss disallowed under the at-risk limits is treated as a deduction from the same activity in the next year. If you are subject to these rules, you file Form 6198. Losses from real property placed in service before 1987 are not subject to them. Publication 925 covers the details.

Passive activity limits

In most cases all rental real estate activities, except those of certain real estate professionals, are passive. A rental activity here is one from which you receive income mainly for the use of tangible property rather than for services. You generally cannot offset income other than passive income with passive losses, and you cannot offset tax on other income with passive credits. Any excess loss or credit is carried forward to the next tax year. Publication 925 has the full rules.

The $25,000 special allowance

If you or your spouse actively participated in a passive rental real estate activity, you may deduct up to $25,000 of loss from nonpassive income such as wages. Active participation means you (and your spouse) owned at least 10 percent of the property and made management decisions or arranged for others to provide services in a significant and bona fide sense. Approving new tenants, deciding on rental terms and approving expenditures can count.

The maximum is $25,000 for single individuals and joint filers, and $12,500 for married individuals filing separately who lived apart all year. It is not available if you were married, lived with your spouse at any time during the year and file separately. If modified adjusted gross income (MAGI) is $100,000 or less ($50,000 for separate filers living apart), you can deduct up to the maximum. Above that, the allowance is 50 percent of the difference between $150,000 ($75,000) and your MAGI, and at $150,000 or more there is no allowance.

Worked example (our arithmetic on the publication's rule): a $30,000 loss and MAGI of $120,000. The allowance is 50% x ($150,000 - $120,000) = $15,000, so $15,000 is deductible now and $15,000 carries forward. At MAGI of $100,000 the allowance is the full $25,000, so a $30,000 loss would allow $25,000. The calculator above also lets other passive income absorb the loss first, as in the publication's example of a single filer with a $3,500 loss and $2,000 of passive income: $2,000 offsets the income and the remaining $1,500 comes off wages.

When you can skip Form 8582

You do not complete Form 8582 if all of these hold: your only passive activities were rental real estate in which you actively participated; your overall net loss is $25,000 or less ($12,500 or less if married filing separately and living apart all year); you have no prior-year unallowed losses or credits from passive activities; your MAGI is $100,000 or less ($50,000 if separate and apart); and you do not hold a rental real estate interest as a limited partner or as a beneficiary of an estate or trust. The publication's full-year example fits: a $213 net loss after $4,363 of straight line depreciation was deducted on Schedule E line 22 without Form 8582.

Real estate professionals

Rentals in which you materially participated are not passive if you qualify as a real estate professional. You must meet both tests: more than half of the personal services you perform in all trades or businesses during the year are in real property trades or businesses in which you materially participate, and you perform more than 750 hours of services in them. Personal services as an employee do not count unless you are a 5 percent owner of the employer, and you cannot count your spouse's services to meet the two tests, though you can count your spouse's participation when deciding whether you materially participated. If you qualify, complete line 43 of Schedule E. Each interest is a separate activity unless you elect to treat all rental real estate interests as one activity.

Personal use changes the picture. Renting a dwelling unit you used as a home is not a passive activity and has its own deduction limits; see how to split expenses with personal use. For the depreciation that often creates the loss, use the rental property depreciation calculator.

Sources

• IRS Publication 527, Residential Rental Property (2025): Limits on Rental Losses (At-Risk Rules, Passive Activity Limits, Form 8582 not required), Reporting Rental Income and Expenses (example). Read November 2, 2026.

Edition read: Publication 527 (2025), for use in preparing 2025 returns. Dollar limits and rates in this publication are for 2025; check the current publication and form instructions for your tax year. Where a figure is described as our arithmetic, it applies the publication’s rule to a made-up example. This page summarizes the publication and does not replace it.