What Is the Rental Real Estate Loss Allowance? (2024)

FAQs

What Is the Rental Real Estate Loss Allowance? ›

The rental real estate loss allowance allows a deduction of up to $25,000 per year in losses from rental properties.

If you're not a real estate professional, a special rule let's you classify up to $25,000 of rental losses as nonpassive. This means you can deduct up $25,000 of rental losses from your nonpassive income, such as wages, salary, dividends, interest and income from a nonpassive business that you own.

Special $25,000 allowance.

This special allowance is an exception to the general rule disallowing the passive activity loss. Similarly, you can 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.

Calculate your actual net loss from rental activities by subtracting expenses from your total rental income. These expenses include utilities included as part of the lease agreement, property taxes and building maintenance. Your allowed net loss is the lessor of your actual net loss or the maximum loss you may report.

This level of participation allows you to deduct up to $25,000 in passive losses from your rental real estate each year against non-passive income. The $25,000 special allowance typically decreases by 50% when adjusted gross income (AGI) exceeds $100,000 and completely disappears when AGI exceeds $150,000.

The loss to lease calculation is simply the market rent of a unit minus the actual rent. For example, if the market rent for a given unit is $1,000 per month and the actual rent is $900 per month, the loss to lease is $100 per month.

You can only claim the losses against your passive income derived from that passive activity. The IRS provides a special $25,000 allowance loophole if your losses were the result of rental real estate activity, although it also depends on your modified adjusted gross income (MAGI).

Under the passive activity rules you can deduct up to $25,000 in passive losses against your ordinary income (W-2 wages) if your modified adjusted gross income (MAGI) is $100,000 or less. This deduction phases out $1 for every $2 of MAGI above $100,000 until $150,000 when it is completely phased out.

If you or your spouse actively participated in a passive rental real estate activity, the amount of the passive activity loss that's disallowed is decreased and you therefore can deduct up to $25,000 of loss from the activity from your nonpassive income.

If you are an active participant in the rental property, losses can fall under a special allowance, which does offset ordinary income. This special allowance is up to $25,000 in losses. However, the investor must meet certain qualifications. First, the investor must have active participation in the rental.

What is the IRS limit on rental property losses? ›

The rental real estate loss allowance allows a deduction of up to $25,000 per year in losses from rental properties.

The simplest way to calculate ROI on a rental property is to subtract annual operating costs from annual rental income and divide the total by the mortgage value. However, there are some other calculations you can use to determine how much of a return you might expect when investing in a specific property.

You Can Carry Losses Forward

The passive activity loss limitations are applied each year. But rental losses continue to carry forward year after year until the losses are either used up by offsetting rental profits or by being deducted against other income.

An individual can claim two allowances if they are single and have more than one job, or are married and are filing taxes separately. Usually, those who are married and have either one child or more claim three allowances.

You'll most likely get a tax refund if you claim no allowances or 1 allowance. If you want to get close to withholding your exact tax obligation, claim 2 allowances for yourself and an allowance for however many dependents you have (so claim 3 allowances if you have one dependent).

You are allowed to claim between 0 and 3 allowances on this form. Typically, the more allowances you claim, the less amount of taxes will be withheld from your paycheck. The fewer allowances you claim, the greater the amount of a refund you might be eligible for.

Rental Losses Are Passive Losses

Here's the basic rule about rental losses you need to know: Rental losses are always classified as "passive losses" for tax purposes. This greatly limits your ability to deduct them because passive losses can only be used to offset passive income.

Loss of Rents coverage is straightforward. If an insured crisis hits the building and forces tenants to move out, this type of protection will replace the monthly rent. The coverage will typically last for the duration of repairs, until the tenants move back in, or up to one year—whichever comes first.

An exception known as the “Mom and Pop Exception” will allow you to deduct up to $25,000 in rental real estate losses per year if you actively participate in the rental activity and your Adjusted Gross Income (AGI) is below $100,000.

Active participation.

If you 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.