Passive Activity Losses: Why a Loss May Not Reduce Your Income Yet
Published November 5, 2026
A loss from some activities cannot always reduce your other income in the same year. The passive activity rules limit these losses. The IRS says passive losses above passive income are disallowed for the current year. You can carry them forward to the next year. IRS: Topic no. 425, Passive activities, losses and credits
What is a passive activity
A passive activity is generally a business you do not materially participate in. You materially participate when you are involved in the operation of the activity on a regular, continuous, and substantial basis. Rental activities are generally passive, even if you materially participate. This is a key point for landlords. IRS: Topic no. 425
The real estate professional exception
Rental real estate activities are not passive if you qualify as a real estate professional. To qualify, more than half of your personal services must be in real property businesses where you materially participate. You must also perform more than 750 hours of those services. Your spouse's services do not count toward these tests on a joint return. IRS: Publication 925 (2025), Passive Activity and At-Risk Rules
The $25,000 rental allowance
If you actively participated in a rental real estate activity, you may deduct up to $25,000 of its loss. You can use it against nonpassive income. Active participation is less strict than material participation. Only individuals can actively participate in rental real estate activities. For example, approving new tenants, setting rental terms, and approving expenditures can count. IRS: Publication 925 (2025)
The $25,000 amount drops by 50 cents for each dollar of modified adjusted gross income (MAGI) above $100,000. If your MAGI is $150,000 or more, the allowance is generally zero. If you file separately, the allowance is $12,500 if you lived apart all year. The reduction starts at $50,000. IRS: Publication 925 (2025)
How the losses are reported
You use Form 8582 to figure the passive activity loss for the year. It also reports losses carried over from earlier years and shows how much you can deduct. IRS: About Form 8582
Credits from passive activities follow a similar rule. Form 8582-CR summarizes them. IRS: Topic no. 425
When suspended losses are released
If you sell your entire interest in the activity, you may generally deduct the disallowed loss that year. Keep your records for every year a loss carries forward. Check each year against the prior year's Form 8582. Short notes help. Unused passive credits are handled differently. You cannot claim them only because you sold the activity. IRS: Topic no. 425
Illustration only, with made-up numbers. Ana is single. Ana has $70,000 of wages, $15,000 of passive income from a partnership, and a $26,000 loss from a rental she actively participates in. Ana's MAGI is under $100,000, so the phaseout does not apply. Ana uses $15,000 of the rental loss against the partnership income. Ana then uses the remaining $11,000 against wages, which is within the $25,000 allowance. Your results depend on your own facts, so this example is only a sketch.
Records to keep
Keep records of each activity's income, expenses, and basis. Keep prior-year Forms 8582. They show suspended losses. These records let you track losses that carry forward to later years. IRS: Publication 925 (2025)
Steps to take
- List each business and rental activity, with its 2025 income and loss.
- Decide whether you materially participated or actively participated in each one.
- Check your MAGI against the $100,000 and $150,000 levels if you have a rental loss.
- Complete Form 8582 to see how much loss you can deduct this year.
- Keep the carryforward amounts for future years.
General information, not advice about your return.
Sources: Sources: IRS, Topic no. 425, Passive activities, losses and credits (https://www.irs.gov/taxtopics/tc425); IRS, About Form 8582 (https://www.irs.gov/forms-pubs/about-form-8582); IRS, Publication 925 (2025), Passive Activity and At-Risk Rules (https://www.irs.gov/publications/p925) This is general information, not advice about your specific return.
