Limit on Rental Losses

Special Loss Allowance

If you actively participated in a passive rental real estate activity, you may be able to deduct up to $25,000 of a loss from your nonpassive income.

Special allowance for losses for taxpayers who are married filing separately

This special allowance cannot be more than $12,500 if married filing a separate return and lived apart from your spouse for the entire year.

If you are married filing a separate return and you lived with your spouse at any time during the year, you cannot use the special allowance.

Reducing maximum loss allowance

The maximum amount of the special allowance is reduced if your modified AGI is:

• more than $100,000 ($50,000 if married filing a separate return and lived apart at all times during the year).

Your modified AGI for this purpose is your AGI figured without including certain income and adjustments. If your modified AGI is $150,000 ($75,000 if married filing a separate return and lived apart at all times during the year) or more, you generally cannot use the special allowance at all.

Definition of actively participating in a rental real estate activity

You actively participate in a rental real estate activity if you (and your spouse if married filing jointly) 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 activities.