The short answer
Section 469(i) lets a natural person who actively participates in a rental real estate activity deduct up to $25,000 of its loss against nonpassive income such as wages. The allowance is reduced by 50 percent of the amount by which modified adjusted gross income exceeds $100,000, so it disappears at $150,000. Active participation is a low standard, approving tenants, setting rental terms and approving expenditures, but you must own at least 10 percent of the activity and limited partners do not qualify. Whatever the allowance does not absorb is suspended and carried forward, and can re-enter the allowance in a later, lower-income year or be released in full on a taxable sale.
At a glance
| Amount | $25,000 per year per taxpayer, not per property; $12,500 for married filing separately and living apart all year |
|---|---|
| Standard | Active participation: management decisions in a significant and bona fide sense, less than material participation |
| Ownership | At least 10 percent of the activity by value, counting your spouse's interest, throughout the year; no limited partner interests |
| Phase-out | Reduced by 50 percent of modified AGI above $100,000; zero at $150,000 ($50,000 to $75,000 if married filing separately) |
| Modified AGI | AGI figured without passive losses, taxable Social Security, IRA and student loan deductions, the self-employment tax deduction and a few exclusions |
| Not indexed | The dollar amounts are written into section 469(i) with no inflation adjustment |
| Estates | An estate is treated as actively participating for tax years ending within 2 years of death if the decedent did |
| Form | Form 8582 Part II computes the allowance; a narrow exception lets simple cases skip the form |
The allowance is the one place a passive rental loss meets a paycheck
The general rule, explained on the passive activity loss rules page, is that a rental loss offsets only passive income. Section 469(i)(1) carves out an exception for a natural person with respect to rental real estate activities in which the individual actively participated during the year, and section 469(i)(2) caps the aggregate at $25,000 for any taxable year.
The cap is per taxpayer, not per property. Three rentals with losses share one $25,000. Publication 925 shows the ordering: passive income from other activities is used first, then the remaining rental loss goes against the allowance. In its example a single taxpayer with $70,000 of wages, $15,000 of passive partnership income and a $26,000 active-participation rental loss uses $15,000 against the partnership income and the remaining $11,000 against wages.
The allowance belongs to individuals. Section 469(i)(6)(D) extends it to a decedent's estate for taxable years ending less than 2 years after death for activities in which the decedent actively participated, and Publication 925 adds that a qualified revocable trust treated as part of the estate can share that treatment. Trusts otherwise do not get it.
Active participation is a low bar; the 10 percent and limited partner rules are hard edges
Publication 925 describes active participation as a less stringent standard than material participation: you may be treated as actively participating if you make management decisions in a significant and bona fide sense, and the decisions that count include approving new tenants, deciding on rental terms and approving expenditures. Hiring a property manager does not defeat it so long as those decisions stay with you.
Two statutory edges are not negotiable. Under section 469(i)(6)(A) you are not treated as actively participating for any period in which your interest, including your spouse's interest, is less than 10 percent by value of all interests in the activity. And except as provided in regulations, a limited partner is not treated as actively participating in a partnership's rental real estate activity, which is why losses allocated from a syndication do not reach the allowance.
Ownership through an LLC taxed as a partnership is tested on the facts: the 10 percent threshold and the limited partner rule both look through to your interest. Grouping can affect whether you clear 10 percent, a point covered on grouping rental activities under the passive activity rules.
The phase-out takes 50 cents of allowance for every dollar of modified AGI above $100,000
Section 469(i)(3)(A) reduces the $25,000 amount, but not below zero, by 50 percent of the amount by which adjusted gross income exceeds $100,000. At $150,000 the reduction is $25,000 and the allowance is gone. Section 469(i)(5) substitutes $12,500 and $50,000 for a married individual filing separately who lived apart from the spouse for the entire year, and denies the allowance entirely to one who lived with the spouse at any time during the year.
The income measure is adjusted gross income with specific items put back. Section 469(i)(3)(F) says AGI is determined without regard to taxable Social Security benefits, the exclusions for certain savings bond interest and adoption assistance, the deductions for IRA contributions, student loan interest and foreign-derived intangible income, and any passive activity loss. Publication 925 adds the deductible part of self-employment tax and any rental loss allowed because you were a real estate professional. The Form 8582 instructions walk through the same list.
A hypothetical with round figures: a married couple filing jointly has $130,000 of modified AGI and a $20,000 active-participation rental loss. Modified AGI exceeds $100,000 by $30,000, half of which is $15,000, so the allowance is $10,000. They deduct $10,000 against wages and carry $10,000 forward. Run your own numbers with your CPA, because a bonus or a Roth conversion can move the line.
What carries over, and how carried losses re-enter the allowance later
The disallowed remainder is a passive loss carried under section 469(b) to the next year as a deduction of the same activity. It is not forfeited. Form 8582 Part IV lists rental real estate activities with active participation together with their prior-year unallowed losses, so in a later year with modified AGI below $150,000 the carried loss competes for that year's allowance alongside the current loss.
A fully taxable sale of your entire interest to an unrelated person releases everything that is still suspended, under section 469(g). An installment sale releases the losses in step with recognized gain, a gift moves them into the donee's basis, and death allows them only to the extent they exceed the step-up. Those rules, and the related-buyer delay, are on the passive loss page linked above.
The instructions let you skip Form 8582 only if your sole passive activity is rental real estate with active participation, you have no prior-year unallowed losses, the loss is $25,000 or less ($12,500 married filing separately), modified AGI is $100,000 or less ($50,000 married filing separately), and you hold no limited partner interests. Once a carryover exists, the form is required every year until it is used.
Where the allowance does not reach: short stays, DST interests and exchanges
A property with average customer use of 7 days or less is not a rental activity under Reg. section 1.469-1T(e)(3), so its loss is tested for material participation instead and never touches the $25,000 allowance. The consequences are on the short-term rental loophole. Publication 925 also keeps a dwelling you used personally for more than the greater of 14 days or 10 percent of the days rented out of the passive rules entirely.
A Delaware statutory trust interest is treated under Rev. Rul. 2004-86 as an undivided interest in the trust's real estate, but the ruling depends on a trustee who cannot renegotiate leases or debt, accept new capital or reinvest proceeds, and on holders who make no such decisions. A holder who approves no tenants, sets no terms and authorizes no expenditures is not actively participating, so a DST loss, where one exists, does not reach the allowance. DST rental income is passive income that absorbs carried losses, which is usually the more useful fact; see passive losses and a DST sale.
A 1031 exchange does not release suspended losses, because nothing is recognized; they carry into the replacement property and remain subject to the allowance there, as explained in suspended passive losses in a 1031 exchange. A landlord weighing a sale against an exchange into the traditional DST exchange solutions should price the released loss on the sale side of that comparison.
Related questions
Can I take the allowance if a property manager runs the building?
Yes, if you still approve tenants, set rental terms and approve expenditures. Publication 925 treats those decisions as active participation even when someone else handles the day-to-day work.
Is the $25,000 per property or per return?
Per return. Section 469(i)(2) caps the aggregate amount for any taxable year at $25,000, however many rentals you own.
What if I am married filing separately?
You get $12,500 with a $50,000 phase-out threshold if you lived apart from your spouse for the entire year, and no allowance at all if you lived together at any time during the year.
Does a loss from a short-term rental qualify?
Not if average customer use is 7 days or less, because that is not a rental activity under the regulations. Its loss is tested for material participation instead.
Is the $25,000 adjusted for inflation?
No. The $25,000, $100,000 and $150,000 figures are stated in section 469(i) without an inflation adjustment, so the phase-out reaches more taxpayers every year.
Sources
Checked against these publications on September 30, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.
- 26 U.S.C. section 469(i), $25,000 offset for rental real estate activities
- IRS, Publication 925, Passive Activity and At-Risk Rules (2025)
- IRS, Instructions for Form 8582, Passive Activity Loss Limitations (2025)
- Reg. section 1.469-1T, General rules (definition of rental activity)
- IRS, Rev. Rul. 2004-86 (Delaware statutory trust interests as real property)