The short answer
Section 469 treats every rental activity as passive no matter how many hours you work, so a rental loss offsets only income from passive activities in the same year; the rest is suspended and carried forward without expiry. Three doors open the rule: the $25,000 allowance for active participants with modified adjusted gross income under $150,000, real estate professional status with material participation, and the exceptions that keep short-stay rentals out of the rental definition. Suspended losses come free in full when you sell your entire interest in a fully taxable sale to an unrelated buyer. A 1031 exchange is not a fully taxable sale, so it releases nothing; the losses follow you into the replacement property.
At a glance
| The default | Section 469(c)(2) treats any rental activity as passive, and 469(c)(4) says material participation does not change that |
|---|---|
| Who it covers | Individuals, estates, trusts, closely held C corporations and personal service corporations |
| Carryforward | A disallowed loss carries to the next year as a deduction of the same activity under section 469(b), with no expiry |
| The allowance | Up to $25,000 against nonpassive income with active participation; phased out between $100,000 and $150,000 of modified AGI |
| The professional exception | More than half of all personal services and more than 750 hours in real property businesses you materially participate in |
| Not a rental at all | Average customer use of 7 days or less, or 30 days or less with significant personal services |
| Release | Sale of your entire interest in a fully taxable transaction to an unrelated buyer |
| The form | Form 8582 tracks every suspended loss by activity each year |
Rental losses are passive by statute, so hours worked do not help on their own
Section 469(a) disallows the passive activity loss of an individual, estate, trust, closely held C corporation or personal service corporation for the year. A passive activity is a trade or business in which you do not materially participate and, under section 469(c)(2), any rental activity. Section 469(c)(4) adds that the rental rule applies without regard to whether or not the taxpayer materially participates.
A rental activity is one where payments are principally for the use of tangible property, section 469(j)(8). Reg. section 1.469-1T(e)(3) then lists six situations that are not rentals at all: average customer use of 7 days or less; 30 days or less with significant personal services; extraordinary personal services; rental incidental to a nonrental activity; property made available during defined business hours for nonexclusive use; and property provided to a partnership or S corporation activity you own. A short-stay rental that falls out of the definition is tested for material participation like any other business, which is the mechanism behind the short-term rental loophole.
The passive activity loss itself is a net figure. Publication 925 nets the income and losses of all your passive activities for the year, so a loss on one rental is absorbed first by net income from another rental or from a passive partnership interest. Only the excess is disallowed.
Disallowed losses are suspended, not lost, and they carry forward by activity
Section 469(b) treats a disallowed loss as a deduction allocable to the same activity in the next taxable year. There is no time limit. Publication 925 explains that the disallowed deductions are allocated among your activities for the next year in a manner that reasonably reflects the extent to which each activity continues the loss activity, citing Reg. section 1.469-1(f)(4).
Form 8582 does the bookkeeping. Part I combines the year's net income and loss from all passive activities, Part IV lists rental real estate with active participation, Part V lists everything else, and the later parts allocate the unallowed loss back to each activity so it can be carried. You file it every year the losses exist, with one narrow exception in the instructions for a single active-participation rental with a loss of $25,000 or less and modified AGI of $100,000 or less and no prior-year unallowed loss.
If an activity stops being passive, for example because you later qualify as a real estate professional, the old losses do not become free. Publication 925 calls this a former passive activity: the prior-year unallowed loss is deductible only up to the current-year net income from that activity, and the balance stays passive.
Two exceptions let a landlord deduct rental losses against wages
The first is the special allowance in section 469(i). A natural person who actively participates in a rental real estate activity may deduct up to $25,000 of its loss against nonpassive income. The allowance is reduced by 50 percent of the amount by which modified adjusted gross income exceeds $100,000, so it is gone at $150,000; a married person filing separately gets $12,500 and a $50,000 threshold, and nothing if the spouses lived together during the year. Active participation needs at least a 10 percent interest and real management decisions. The detail is on the $25,000 rental loss allowance page.
The second is the real property business exception in section 469(c)(7). If more than one-half of the personal services you perform in all trades or businesses, and more than 750 hours, are in real property trades or businesses in which you materially participate, your rentals are no longer passive by definition. Each rental is then a separate activity that must pass a material participation test unless you elect to treat all interests in rental real estate as a single activity. The two tests and the election have their own page, and so does grouping rentals into one activity.
Both exceptions also bear on the 3.8 percent net investment income tax. Under section 1411(c)(1)(A), rents and income from a passive activity are net investment income; income from a rental that is a nonpassive trade or business is not. The page on NIIT when selling a rental covers the sale side.
A hypothetical three-year run shows how the suspended pile builds and drains
Take a single filer with $180,000 of wages and one rental; the figures are hypothetical and rounded. Year one: the rental loses $20,000. Modified AGI is above $150,000, so the allowance is zero and the whole $20,000 is suspended.
Year two: the rental loses $15,000 and a passive partnership pays $5,000 of net income. The $5,000 absorbs part of the current loss; $10,000 of new loss joins the $20,000 carried in, for $30,000 suspended. Year three: the rental nets $8,000 of income after rent increases. That income is passive, so $8,000 of the suspended loss is used and $22,000 remains.
Year four: the rental is sold to an unrelated buyer in a taxable sale. All $22,000 is released as a nonpassive loss and offsets the gain, the recapture or the wages. Run your own numbers with your CPA; the sequence matters more than the figures.
Selling releases the losses; exchanging keeps them suspended
Section 469(g)(1)(A) releases suspended losses when you dispose of your entire interest in the activity in a transaction in which all realized gain or loss is recognized. The excess of the activity's losses over your net passive income for the year is then treated as a loss which is not from a passive activity. Section 469(g)(1)(B) delays that result if the buyer is related to you under section 267(b) or 707(b)(1): the losses stay passive until the related buyer sells to someone unrelated.
Three other exits behave differently. On an installment sale, section 469(g)(3) releases the losses in the same ratio as gain is recognized each year. On a gift, section 469(j)(6) adds the suspended losses to the donee's basis and they are never deducted. At death, section 469(g)(2) allows them only to the extent they exceed the step-up in the heir's basis.
A 1031 exchange recognizes no gain, so section 469(g) does not fire. The losses remain suspended and are reallocated to whatever continues the activity, including the replacement property, and boot you take is passive income that can absorb them; the mechanics are on suspended passive losses in a 1031 exchange. If the replacement is a Delaware statutory trust interest, Rev. Rul. 2004-86 treats the holder as owning an undivided interest in the trust's real estate, so the DST's rental income is passive income against which the carried losses can be used; see passive losses and a DST sale and the traditional DST exchange solutions.
Related questions
Do suspended rental losses expire?
No. Section 469(b) carries a disallowed loss to the next year as a deduction of the same activity, year after year, until passive income or a fully taxable disposition uses it.
Can a loss from one rental offset income from another?
Yes. The passive activity loss is computed by netting all passive activities, so net income from one rental or a passive partnership absorbs the loss of another before anything is suspended.
Can I use suspended losses against wages or stock gains?
Only through the $25,000 allowance, real estate professional status, or a fully taxable sale of your entire interest. Until one of those applies, the losses offset passive income only.
If my income falls in a later year, do carried losses get the $25,000 allowance?
Yes. Form 8582 includes prior-year unallowed losses from active-participation rentals in the allowance computation, so a year with modified AGI under $150,000 can free part of the carried pile.
Does DST income count as passive income my suspended losses can offset?
A DST holder is treated as owning an undivided interest in the trust's rental real estate under Rev. Rul. 2004-86, and rental income you do not materially participate in is passive, so the carried losses can offset it. Confirm the allocation with your CPA.
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, Passive activity losses and credits limited
- Reg. section 1.469-1T, General rules (definition of rental activity and exceptions)
- IRS, Publication 925, Passive Activity and At-Risk Rules (2025)
- IRS, Instructions for Form 8582, Passive Activity Loss Limitations (2025)
- 26 U.S.C. section 1411, Imposition of tax (net investment income)
- IRS, Rev. Rul. 2004-86 (Delaware statutory trust interests as real property)