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Passive-Activity Loss Limits
Are deductible, up to the amount of your passive-activity income
Include losses from trade or business activities you don't materially participate in
Rental activities are always considered passive. That’s 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
You might have passive-activity losses from rental real-estate activities you actively participate in. If so, you're allowed a special allowance of:
$25,000 ($25,000) if you’re single or married filing jointly
$12,500 ($12,500) if you’re married filing separately and lived apart all year
Will be reduced by 50% of the amount of your modified adjusted gross income (AGI) that’s more than $100,000 -- $50,000 if married filing separately
Can’t be used if your income is $150,000 or more -- $75,000 if married filing separately -- unless you have an exception claiming low-income housing credits
You actively participate in rental real-estate activities if both of these apply:
You have a 10% or greater ownership interest throughout the year.
You make management decisions, like:
Approving new tenants
Deciding on rental terms
From nonpassive income, you can deduct the lower of these:
$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.
Ex: You have $5,000 in income from a limited partnership and $27,000 in losses from active participation in rental real estate activities. So, $5,000 of the loss offsets the passive income.
Depending upon your modified AGI, you might be able to deduct the other $22,000. The $25,000 limit is reduced by $1 for every $2 that your modified AGI is more than $100,000 . Under the $25,000 rule, you can’t claim losses when your modified AGI is $150,000 or more.
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.
Ex: If your modified AGI is $130,000, the $25,000 limit is reduced by $15,000: