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Other Business Considerations

Passive-activity loss limits
Passive-activity losses are deductible up to the amount of your passive-activity income. They include losses from trade or business activities you don't materially participate in.

Rental activities are always considered passive. This is true unless you materially participate as a real estate professional. An activity is a rental activity if the income generated:

  • Is mainly from the use of property
  • Isn’t mainly from the performance of services

Special allowance 

You might have passive-activity losses from rental real-estate activities you actively participate in. If so, you're allowed a special allowance based on your filing status:

  • Single or married filing jointly -- $25,000
  • Married filing separately and lived apart all year -- $12,500

This allowance:

  • Will be reduced by 50% of the amount of your modified adjusted gross income (AGI) that's more than $100,000 -- or $50,000 if married filing separately
  • Can’t be used if your income is $150,000 or more -- or $75,000 if married filing separately. This is true unless you have an exception claiming low-income housing credits.

You actively participate in rental real-estate activities if both of these are true:

  • You have a 10% or greater ownership interest throughout the year.
  • You make management decisions, like:
    • Approving new tenants
    • Deciding on rental terms
    • Approving expenditures

You can deduct the lower of these from your nonpassive income:

  • $25,000 -- or a reduced amount
  • Net loss from active-participation rental real-estate activities

Losses are offset against passive income before figuring the amount allowed under this provision.

If you and your spouse file separate returns and you lived apart for the entire year, the limit is $12,500. This begins to phase out when your modified AGI is more than $50,000. If your modified AGI is $75,000 or more, you can’t claim losses. If you lived together at any time during the year, you also can’t claim losses.

If you'd like to learn more, see the Rentals and Royalties tax tip.

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