Is rental income passive?

The default: rentals are passive

Publication 925 sorts passive activities into two kinds. One is a trade or business in which you do not materially participate. The other is a rental activity, and the publication is blunt that a rental activity is passive even if you do materially participate, with a single exception for people who qualify as real estate professionals. So the usual rule for the landlord who spends every weekend repairing a duplex is still passive treatment. What changes is how the loss is handled, because the working landlord can often use the special allowance described below.

What counts as a rental activity

An activity is a rental activity if tangible property, real or personal, is used by customers or held for use by customers, and the gross income or expected gross income represents amounts paid mainly for the use of the property. It does not matter whether the arrangement is called a lease, a service contract or something else.

Several situations are carved out and are not rental activities for these rules:

• The average period of customer use is 7 days or less. Divide the total days in all rental periods by the number of rentals in the year. A weekly-or-shorter vacation rental business may therefore fall outside the rental category.
• The average use is 30 days or less and you provide significant personal services. Only services performed by individuals count. Services needed to permit lawful use, services that extend the property's useful life substantially longer than the average rental, and services like routine cleaning of common areas or repairs that normally come with long-term rentals do not count as significant.
• You provide extraordinary personal services, meaning individuals perform services and the customer's use of the property is incidental to receiving them.
• The rental is incidental to a nonrental activity. For investment property held mainly for appreciation, that means gross rent below 2% of the smaller of the property's unadjusted basis or fair market value. For rent incidental to your own business, the property must be used mainly in that business in the current year or in at least 2 of the 5 prior years, with the same 2% test.
• You customarily make the property available during defined business hours for nonexclusive use by various customers.
• You provide the property for use in a nonrental activity in your capacity as an owner of a partnership, S corporation or joint venture.

When an exception applies, the Form 8582 instructions explain how to report the income or loss, and a separate rule applies to a home you also use personally: the rental of a dwelling unit you used for personal purposes for more than the greater of 14 days or 10% of the days it was rented at a fair rental is listed among activities that are not passive activities.

The special $25,000 allowance

If you or your spouse actively participated in a passive rental real estate activity, the disallowed passive loss is reduced and you can deduct up to $25,000 of loss from the activity against nonpassive income, such as wages. Active participation is a lower bar than material participation. Approving new tenants, deciding rental terms and approving expenditures are examples of the bona fide management decisions that count. Only individuals can actively participate, with a limited rule letting a decedent's estate qualify for tax years ending less than 2 years after death. Limited partners are generally not treated as actively participating, and you must have held at least a 10% interest by value (including your spouse's) throughout the year.

Married people filing separately who lived apart all year get at most $12,500. If a separately filing spouse lived with the other at any time during the year, the allowance cannot be used at all.

The phase-out, stated as the publication states it

The maximum allowance of $25,000 ($12,500 for married filing separately and living apart all year) is reduced by 50% of the amount of modified adjusted gross income that is more than $100,000 ($50,000 for married filing separately). At $150,000 or more of modified adjusted gross income ($75,000 or more for married filing separately) the allowance is generally reduced to zero. Modified adjusted gross income is adjusted gross income figured without items such as taxable social security and Tier 1 railroad retirement benefits, deductible IRA contributions, student loan interest, the deductible part of self-employment tax and passive activity income or loss reported on Form 8582.

The publication's worked example: you are unmarried, have $120,000 of salary, and a $31,000 loss from rentals you actively manage. Modified AGI is $120,000, so $20,000 is subject to the phase-out. Half of that, $10,000, reduces the $25,000 allowance to $15,000. You deduct $15,000 and carry $16,000 to 2026. The checker above reproduces that result, and the second example in the publication too: a $26,000 rental loss and $15,000 of passive income from a limited partnership at MAGI under $100,000 uses $15,000 against the passive income and $11,000 against wages.

Rehabilitation credits phase out above $200,000 ($100,000 married filing separately, living apart), and the low-income housing credit has no phase-out.

When the rental is not passive

Rental real estate is not passive if you were a real estate professional and materially participated in the rental. Rental of a dwelling used personally beyond the 14-day or 10% threshold is also outside the passive category, as is the net income recharacterization for property where less than 30% of unadjusted basis is depreciable, such as land. In that last case, net passive income is treated as nonpassive, so it cannot be used to absorb passive losses.

Carryover

A disallowed loss is not lost. The disallowed deductions are allocated among your activities for the next year in a manner that reasonably reflects the extent to which each activity continues the loss activity, and they are treated as deductions from the activity next year. If a former passive activity becomes nonpassive, you can deduct the prior-year unallowed loss up to your current-year net income from it. When you sell your entire interest, the rest is released (see the page on deducting passive losses when you sell).

Sources

• IRS Publication 925, Passive Activity and At-Risk Rules (2025): Passive Activities; Rental Activities (Exceptions); Special $25,000 allowance (Active participation, Phaseout rule, Exceptions to the phaseout rules); Activities That Aren't Passive Activities; Treatment of former passive activities; Carryover of Disallowed Deductions; Rental of Nondepreciable Property. Read November 2, 2026.

Edition read: Publication 925 (2025), for use in preparing 2025 returns. Dollar limits and dates in this publication are for 2025; check the current publication and form instructions for your tax year. This page summarizes the publication and does not replace it.