What Is Rental Real Estate Loss Allowance?

The rental real estate loss allowance is a federal tax deduction available to taxpayers who own rental properties in the United States. Under the tax code, an individual may deduct up to $25,000 of real estate loss per year as long as their adjusted gross income is $100,000 or less. The deduction phases out as an individual's income approaches $150,000. Individuals whose adjusted gross income exceeds $150,000 are not eligible for this deduction.

This deduction is only available to non-real estate professionals who own at least a 10% interest in a rental property that they actively manage and that operates at a loss during a particular tax year.

Key Takeaways

  • The rental real estate loss allowance provides a financial cushion against an unpredictable rental market.
  • The Tax Cuts and Jobs Act (TCJA) did not alter the deduction amount of $25,000.
  • The tax code allows building owners to deduct up to $25,000 of real estate loss per year. This is in total for all properties owned, not per property.
  • To qualify for the deduction, an individual must be an active manager of his or her rental property or properties.
  • High-income landlords do not qualify for the deduction, which cuts off income eligibility at $150,000. 

Understanding the Rental Real Estate Loss Allowance

The rental real estate tax loss allowance requires property owners to actively participate in managing the property in order to qualify for the deduction.

To meet the active participation test, the taxpayer must make management decisions for the property. It is possible to meet this test even if the rental property is run by a management company. However, a taxpayer must be able to demonstrate that they have put in a minimum number of hours participating in the property’s management per year.

Rental losses are considered passive losses by the tax code. Passive losses are less likely to qualify for deductions than other types of losses. The tax code considers losses or income as passive when the taxpayer does not work to actively earn the income or create the loss. For example, money made through investments in stocks is passive, because the taxpayer is not actively earning the money.

Special Considerations

In 2017, the Tax Cuts and Jobs Act (TCJA) was signed into law in the United States. This law created large changes in the American tax code. Under the new tax code, previous passive activity loss rules still apply. Under these rules, a person may only deduct passive losses, such as rental losses, to the extent that they have passive income coming from other sources, including other rental properties.

The TCJA also created a new deduction for pass-through business entities. Property owners may take advantage of this new deduction by using a pass-through entity such as a sole proprietorship or an LLC to qualify for a 20 percent deduction from their qualified business income, as per the Internal Revenue Service.