If you have a loss from your rental real estate activity, two sets of rules may limit the amount of loss you can deduct. You must consider these rules in the order shown below. Both are discussed in this section.
- At-risk rules. These rules are applied first if there is investment in your rental real estate activity for which you are not at risk. This applies only if the real property was placed in service after 1986.
- Passive activity limits. Generally, rental real estate activities are considered passive activities and losses are not deductible unless you have income from other passive activities to offset them. However, there are exceptions.
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.
Losses from holding real property (other than mineral property) placed in service before 1987 are not subject to the at-risk rules.
Generally, any loss from an activity subject to the at-risk rules is allowed only to the extent of the total amount you have at risk in the activity at the end of the tax year. You are considered at risk in an activity to the extent of cash and the adjusted basis of other property you contributed to the activity and certain amounts borrowed for use in the activity. Any loss that is disallowed because of the at-risk limits is treated as a deduction from the same activity in the next tax year. See Publication 925 for a discussion of the at-risk rules. taxmap/pubs/p527-008.htm#en_us_publink1000219120
If you are subject to the at-risk rules, file Form 6198, At-Risk Limitations, with your tax return.taxmap/pubs/p527-008.htm#en_us_publink1000219121
Generally, all rental real estate activities (except those meeting the exception for real estate professionals, earlier) are passive activities. For this purpose, a rental activity is an activity from which you receive income mainly for the use of tangible property, rather than for services. For a discussion of activities that are not considered rental activities, see Rental Activities in Publication 925.
Deductions for losses from passive activities are limited. You generally cannot offset income, other than passive income, with losses from passive activities. Nor can you offset taxes on income, other than passive income, with credits resulting from passive activities. Any excess loss or credit is carried forward to the next tax year. Two exceptions to the rules for figuring passive activity limits are discussed on this page.
For a detailed discussion of these rules, see Publication 925.taxmap/pubs/p527-008.htm#en_us_publink1000234059
If you meet the qualifications discussed on this page, report your rental income and expenses on Schedule C or C-EZ (or Form 1065 if a partnership). Use Schedule SE to figure your self-employment tax. Also, complete line 43 of Schedule E.
You qualify as a real estate professional for the tax year if you meet both of the following requirements.
- More than half of the personal services you perform in all trades or businesses during the tax year are performed in real property trades or businesses in which you materially participate.
- You perform more than 750 hours of services during the tax year in real property trades or businesses in which you materially participate.
For purposes of meeting these qualifications, each interest in rental real estate is a separate activity, unless you elect to treat all your interests in rental real estate as one activity.
Do not count personal services you perform as an employee in real property trades or businesses unless you are a 5% owner of your employer. You are a 5% owner if you own (or are considered to own) more than 5% of your employer's outstanding stock, or capital or profits interest.
Do not count your spouse's personal services to determine whether you met the requirements listed above. However, you can count your spouse's participation in an activity in determining if you materially participated. taxmap/pubs/p527-008.htm#en_us_publink1000234060
A real property trade or business is a trade or business that does any of the following with real property.
- Develops or redevelops it.
- Constructs or reconstructs it.
- Acquires it.
- Converts it.
- Rents or leases it.
- Operates or manages it.
- Brokers it.
If you were a real estate professional and had more than one rental real estate interest during the year, you can choose to treat all the interests as one activity. You can make this choice for any year that you qualify as a real estate professional. If you forgo making the choice for one year, you can still make it for a later year.
If you make the choice, it is binding for the tax year you make it and for any later year that you are a real estate professional. This is true even if you are not a real estate professional in any intervening year. (For that year, the exception for real estate professionals will not apply in determining whether your activity is subject to the passive activity rules.)
See the instructions for Schedule E for information about making this choice.taxmap/pubs/p527-008.htm#en_us_publink1000234062
Generally, you materially participated in an activity for the tax year if you were involved in its operations on a regular, continuous, and substantial basis during the year. For details, see Publication 925 or the instructions for Schedule C. taxmap/pubs/p527-008.htm#en_us_publink1000234063
If you are married, determine whether you materially participated in an activity by also counting any participation in the activity by your spouse during the year. Do this even if your spouse owns no interest in the activity or files a separate return for the year. taxmap/pubs/p527-008.htm#en_us_publink1000219122
You may have to complete Form 8582 to figure the amount of any passive activity loss for the current tax year for all activities and the amount of the passive activity loss allowed on your tax return. See Form 8582 not required, later in this chapter, to determine if you must complete Form 8582.
If you are required to complete Form 8582 and are also subject to the at-risk rules, include the amount from Form 6198, line 21 (deductible loss) in column (b) of Form 8582, Worksheet 1 or 3, as required.taxmap/pubs/p527-008.htm#en_us_publink1000219123
If you used the rental property as a home during the year, any income, deductions, gain, or loss allocable to such use shall not be taken into account for purposes of the passive activity loss limitation. Instead, follow the rules explained in chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). taxmap/pubs/p527-008.htm#en_us_publink1000219124
If you or your spouse actively participated in a passive rental real estate activity, you can deduct up to $25,000 of loss from the activity from your nonpassive income. This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. Similarly, you can offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception.taxmap/pubs/p527-008.htm#en_us_publink1000219125
Jane is single and has $40,000 in wages, $2,000 of passive income from a limited partnership, and $3,500 of passive loss from a rental real estate activity in which she actively participated. $2,000 of Jane's $3,500 loss offsets her passive income. The remaining $1,500 loss can be deducted from her $40,000 wages.
The special allowance is not available if you were married, lived with your spouse at any time during the year, and are filing a separate return.
You actively participated in a rental real estate activity if you (and your spouse) owned at least 10% of the rental property and you made management decisions or arranged for others to provide services (such as repairs) in a significant and bona fide sense. Management decisions that may count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and other similar decisions. taxmap/pubs/p527-008.htm#en_us_publink1000219128
Mike is single and had the following income and losses during the tax year:
| ||Salary||$42,300|| |
| ||Dividends||300|| |
| ||Interest||1,400|| |
| ||Rental loss||(4,000)|| |
The rental loss was from the rental of a house Mike owned. Mike had advertised and rented the house to the current tenant himself. He also collected the rents, which usually came by mail. All repairs were either made or contracted out by Mike.
Although the rental loss is from a passive activity, because Mike actively participated in the rental property management he can use the entire $4,000 loss to offset his other income.taxmap/pubs/p527-008.htm#en_us_publink1000219130
The maximum special allowance is:
- $25,000 for single individuals and married individuals filing a joint return for the tax year,
- $12,500 for married individuals who file separate returns for the tax year and lived apart from their spouses at all times during the tax year, and
- $25,000 for a qualifying estate reduced by the special allowance for which the surviving spouse qualified.
If your modified adjusted gross income (MAGI) is $100,000 or less ($50,000 or less if married filing separately), you can deduct your loss up to the amount specified above. If your MAGI is more than $100,000 (more than $50,000 if married filing separately), your special allowance is limited to 50% of the difference between $150,000 ($75,000 if married filing separately) and your MAGI.
Generally, if your MAGI is $150,000 or more ($75,000 or more if you are married filing separately), there is no special allowance.taxmap/pubs/p527-008.htm#en_us_publink1000219131
This is your adjusted gross income from Form 1040, line 38, or Form 1040NR, line 36, figured without taking into account:
- The taxable amount of social security or equivalent tier 1 railroad retirement benefits,
- The deduction allowed for contributions to IRAs or certain other qualified retirement plans,
- The exclusion from income of interest from Series EE and I U.S. savings bonds used to pay higher educational expenses,
- The exclusion of amounts received under an employer's adoption assistance program,
- Any passive activity income or loss included on Form 8582,
- Any rental real estate loss allowed to real estate professionals,
- Any overall loss from a publicly traded partnership (see Publicly Traded Partnerships (PTPs) in the Instructions for Form 8582),
- The deduction allowed for one-half of self-employment tax,
- The deduction allowed for interest paid on student loans,
- The deduction for qualified tuition and related fees, and
- The domestic production activities deduction (see the Instructions for Form 8903).
Do not complete Form 8582 if you meet all of the following conditions.
- Your only passive activities were rental real estate activities in which you actively participated.
- Your overall net loss from these activities is $25,000 or less ($12,500 or less if married filing separately).
- If married filing separately, you lived apart from your spouse all year.
- You have no prior year unallowed losses from these activities.
- You have no current or prior year unallowed credits from passive activities.
- Your MAGI is $100,000 or less ($50,000 or less if married filing separately and you lived apart from your spouse all year).
- You do not hold any interest in a rental real estate activity as a limited partner or as a beneficiary of an estate or a trust.
If you meet all of the conditions listed above, your rental real estate activities are not limited by the passive activity rules and you do not have to complete Form 8582. On line 23 of your Schedule E, enter each rental real estate loss shown on line 22.
If you do not meet all of the conditions listed above, see the Instructions for Form 8582 to find out if you must complete and attach that form to your tax return.