Rental Real Estate Loss Allowance

What Is the Rental Real Estate Loss Allowance?

The rental real estate loss allowance is a federal tax deduction available to taxpayers who own and rent property in the U.S. Up to $25,000 may be deducted as a real estate loss per year as long as the individual's adjusted gross income is $100,000 or less. The deduction phases out for individuals earning between $100,000 and $150,000. People with higher adjusted gross incomes are not eligible for the deduction.

The deduction is available only 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 allows a deduction of up to $25,000 per year in losses from rental properties.
  • The 2017 tax overhaul left this deduction intact.
  • Property owners who do business through a pass-through entity may qualify for a 20% deduction under the new law.

Understanding the Rental Real Estate Loss Allowance

The rental real estate tax loss allowance is available only to property owners who actively participate in the management of the property. To meet the active participation test, the taxpayer must make management decisions for the property. It is possible to meet the test even if the property is run by a management company. The taxpayer must be able to demonstrate that they have put in a minimum number of hours per year managing the property.

Rental real estate proceeds are considered to be passive income, like stock profits.

The tax code considers rental losses to be passive losses. In general, fewer taxpayers qualify for such deductions. By definition, they are not earned income. For example, money made through stock investments also is passive income.

Special Considerations

In 2017, the Tax Cuts and Jobs Act (TCJA) made sweeping changes to the American tax code. In this case, previous rules on passive income remained intact. An individual may only deduct passive losses, such as rental losses, to the extent that they have passive income coming in from other sources, including other rental properties.

The act also created a new deduction for pass-through business entities such as limited liability companies (LLC) or sole proprietorships. Property owners who do business under such entities may qualify for a 20% deduction from their qualified business incomes.

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  1. Internal Revenue Service. "Publication 925 - Passive Activity and At-Risk Rules," Page 4. Accessed Nov. 18, 2020.

  2. Internal Revenue Service. "Publication 925 - Passive Activity and At-Risk Rules," Page 13. Accessed Nov. 18, 2020.

  3. Internal Revenue Service. "Tax Cuts and Jobs Act, Provision 11011 Section 199A - Qualified Business Income Deduction FAQs." Accessed Nov. 18, 2020.