Rental real estate activities are generally considered passive activities, and the amount of loss you can deduct is limited. Generally, you cannot deduct losses from rental real estate activities unless you have income from other passive activities. See Passive Activity Limits, later.
Losses from passive activities are first subject to the at-risk rules. At-risk rules limit the amount of deductible losses from holding most real property placed in service after 1986.
If your rental losses are less than $25,000 ($12,500 if married filing separately), the passive activity limits probably do not apply to you. See Losses From Rental Real Estate Activities,
Property used as a home.
If you used the rental property as a home during the year, the passive activity rules do not apply to that home. Instead, you must follow the rules explained earlier under Personal Use of Vacation Home or Dwelling Unit.
The at-risk rules place a limit on the amount you can deduct as losses from activities often described as tax shelters. 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. See Publication 925 for more information.
Passive Activity Limits
In general, rental activities (except those meeting the exception for real estate professionals, below) 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.
Limits on passive activity deductions and credits.
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.
For a detailed discussion of these rules, see Publication 925.
You may have to complete Form 8582, Passive Activity Loss Limitations, to figure the amount of any passive activity loss for the current year for all activities and the amount of the passive activity loss allowed on your tax return.
Exception for real estate professionals.
Rental activities in which you materially participated
during the year are not passive activities if, during that year, you were a real estate professional because you met two requirements. For a detailed discussion of these requirements, see Publication 527.
Losses From Rental Real Estate Activities
If you actively participated in a passive rental real estate activity, you may be able to deduct up to $25,000 of loss from the activity from nonpassive income. This special allowance cannot be more than $12,500 if you were married, file a separate return, and lived apart from your spouse at all times during the year. It is not available if you were married, file a separate return, and did not live apart from your spouse at all times during the year.
The maximum amount of the special allowance is reduced if your modified adjusted gross income is more than $100,000 ($50,000 if married filing separately).
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 in a significant and bona fide sense. Management decisions include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions.
See Publication 925 for more information on the passive loss limits, including information on the treatment of unused disallowed passive losses and credits and the treatment of gains and losses realized on the disposition of a passive activity.
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