The IRS classifies most rental income as passive activity. Losses from passive activities (like depreciation exceeding rental income) can generally only offset other passive income, not W-2 wages or business income.
Exception — $25,000 passive loss allowance: If your MAGI is under $100,000 and you actively participate in managing your rentals, you can deduct up to $25,000 of rental losses against ordinary income. This phases out between $100,000–$150,000 MAGI.
Suspended passive losses carry forward to future years and are fully deductible when the property is sold.
Related Terms
MACRS Depreciation
IRS tax deduction allowing investors to deduct the cost of a building over 27.5 years (residential) or 39 years (commercial).
Bonus Depreciation
Accelerated IRS deduction allowing investors to write off a large percentage of qualifying property components in year one.
Real Estate Professional Status
IRS designation that allows unlimited rental loss deductions against ordinary income if you meet strict time requirements.