Passive Activity Limits: Rental Property Taxes (2025 IRS Guide)
This guide covers “Passive Activity Limits” within rental property taxes. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.
Adapted from Publication 527 (2025), Residential Rental Property, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.
Context for these rules
If you have a loss from your rental real estate activity, two sets of rules may limit the amount of loss you can report on Schedule E. You must consider these rules in the order shown below. Both are discussed in this section.
Passive Activity Limits
In most cases, all rental real estate activities (except those of certain real estate professionals, discussed later) 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 aren’t considered rental activities, see Rental Activities in Pub. 925.
Deductions or losses from passive activities are limited. You generally can’t 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. Exceptions to the rules for figuring passive activity limits for personal use of a dwelling unit and for rental real estate with active participation are discussed later.
For a detailed discussion of these rules, see Pub. 925.
Real estate professionals.
If you are a real estate professional, 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.
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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.
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You perform more than 750 hours of services during the tax year in real property trades or businesses in which you materially participate.
Don’t 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.
Don’t count your spouse’s personal services to determine whether you met the requirements listed earlier to qualify as a real estate professional. However, you can count your spouse’s participation in an activity in determining if you materially participated.
Real property trades or businesses.
A real property trade or business is a trade or business that does any of the following with real property.
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Develops or redevelops it.
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Constructs or reconstructs it.
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Acquires it.
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Converts it.
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Rents or leases it.
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Operates or manages it.
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Brokers it.
Choice to treat all interests as one activity.
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 aren’t a real estate professional in any intervening year. (For that year, the exception for real estate professionals won’t 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.
Material participation.
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 Pub. 925 or the Instructions for Schedule C.
Participating spouse.
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.
Form 8582.
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 2, as required.
Exception for Personal Use of Dwelling Unit
If you used the rental property as a home during the year, any income, deductions, gain, or loss allocable to such use is not to be taken into account for purposes of the passive activity loss limitation. Instead, follow the rules explained in chapter 5.
Exception for Rental Real Estate With Active Participation
If you or your spouse 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 your nonpassive income. This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. Similarly, you may be able to 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.
Example.
You are single and have $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 you actively participated. $2,000 of your $3,500 loss offsets your passive income. The remaining $1,500 loss can be deducted from your $40,000 wages.
.The special allowance isn’t available if you were married, lived with your spouse at any time during the year, and are filing a separate return. .
Active participation.
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.
Example.
You are 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 you owned. You had advertised and rented the house to the current tenant yourself. You also collected the rents, which usually came by mail. You made or contracted out all repairs.
Although the rental loss is from a passive activity, because you actively participated in the rental property management, you can use the entire $4,000 loss to offset your other income.
Maximum special allowance.
The maximum special allowance is:
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$25,000 for single individuals and married individuals filing a joint return for the tax year,
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$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
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$25,000 for a qualifying estate reduced by the special allowance for which the surviving spouse qualified.
If your 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.
Modified adjusted gross income (MAGI).
For more information on the definition of MAGI, see Special $25,000 allowance in Pub. 925. Also see Line 6 in the Instructions for Form 8582.
Form 8582 not required.
Don’t complete Form 8582 if you meet all of the following conditions.
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Your only passive activities were rental real estate activities in which you actively participated.
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Your overall net loss from these activities is $25,000 or less ($12,500 or less if married filing separately and you lived apart from your spouse all year).
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If married filing separately, you lived apart from your spouse all year.
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You have no prior-year unallowed losses from these (or any other passive) activities.
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You have no current or prior-year unallowed credits from passive activities.
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Your MAGI is $100,000 or less ($50,000 or less if married filing separately and you lived apart from your spouse all year).
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You don’t 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 aren’t limited by the passive activity rules and you don’t have to complete Form 8582. On lines 23a through 23e of your Schedule E, enter the applicable amounts.
Using the guidance
Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.
Sources and further reading
- Publication 527 (2025), Residential Rental Property: Reporting Rental Income, Expenses, and Losses — Limits on Rental Losses — Passive Activity Limits — Internal Revenue Service; 2025 edition.
The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.