The $25,000 rental loss allowance and its phase-out
Who qualifies, what active participation means, how modified adjusted gross income is figured, and a table by income.
By Hans Goldstein, Enrolled Agent, admitted to practice before the IRS ·
The rule
IRC 469(i) makes an exception to the general rule that passive losses offset only passive income. For a natural person who "actively participated" in rental real estate, up to $25,000 of the passive loss attributable to those activities is not disallowed. The allowance is reduced by 50% of the amount by which adjusted gross income, with the modifications in the statute, exceeds $100,000.
The table
| Modified adjusted gross income | Maximum allowance |
|---|---|
| $90,000 | $25,000 |
| $100,000 | $25,000 |
| $110,000 | $20,000 |
| $120,000 | $15,000 |
| $130,000 | $10,000 |
| $140,000 | $5,000 |
| $150,000 or more | $0 |
Married filing separately and living apart all year: halve every number (maximum $12,500, phase-out from $50,000 to $75,000). Married filing separately and living with your spouse at any time during the year: no allowance (IRC 469(i)(5)).
Modified adjusted gross income, defined
For this test, adjusted gross income is figured without regard to taxable Social Security benefits (IRC 86), the exclusions under IRC 85(c), 135 and 137, the deductions under IRC 219 (IRAs), 221 (student loan interest) and 250, and any passive activity loss or any loss allowable under the real estate professional rule (IRC 469(i)(3)(E)).
The Form 8582 instructions walk through it on line 6. Include any overall loss from the entire disposition of a passive activity, which is non-passive.
Active participation
Active participation is a lower standard than material participation. Pub. 925: you may be treated as actively participating "if you make management decisions in a significant and bona fide sense," such as approving new tenants, deciding on rental terms and approving expenditures.
You need at least a 10% interest, by value, at all times during the year (IRC 469(i)(6)(A)). Limited partners do not qualify. Either spouse's participation counts for a joint return (IRC 469(i)(6)(D)).
How it fits with the rest
- The allowance is applied after passive income has offset passive losses. It covers the excess rental loss, up to the limit.
- Prior-year suspended rental losses are in the pool. Use the allowance to release them if your income is low enough.
- Above $150,000, the allowance is zero, which is why high earners end up with piles of suspended losses. The ways out are in the guide: a qualifying sale, or real estate professional status.
- Its use is reported on Form 8582, Part II.
Sources and dates
- 26 USC 469(i).
- 2025 Instructions for Form 8582, "Special Allowance for Rental Real Estate Activities."
- IRS Publication 925 (2025), Passive Activity and At-Risk Rules, "Rental Activities."
Checked against the sources above on October 30, 2026. Dollar figures are 2026 federal (Rev. Proc. 2025-32) unless the page says otherwise. Education only, not tax or legal advice for your situation.
Questions
What is the $25,000 rental loss allowance?
A special allowance letting an individual who actively participated in a rental real estate activity deduct up to $25,000 of its passive loss against non-passive income (IRC 469(i)). It phases out as modified adjusted gross income rises from $100,000 to $150,000.
What is active participation?
A less demanding standard than material participation. Making management decisions in a significant and bona fide sense, such as approving new tenants, setting rental terms or approving repairs, can be enough. You need at least a 10% interest in the activity (IRC 469(i)(6)).
Is the $25,000 indexed for inflation?
No. The $25,000 and the $100,000 and $150,000 thresholds are fixed in the statute. They have not changed since 1986.
What if I am married filing separately?
If you lived with your spouse at any time during the year, you cannot use the allowance. If you lived apart all year, the amounts are halved: $12,500, with the phase-out from $50,000 to $75,000 (IRC 469(i)(5)).
Can a limited partner use it?
No. Limited partners are not treated as actively participating in a partnership's rental real estate activity (IRC 469(i)(6)(C)).
Does it use up my suspended losses?
It can. Prior-year unallowed rental real estate losses are entered with the current-year amounts and the allowance applies to the combined loss, but only if you actively participated in the activity both in the year the loss arose and in the current year (Form 8582 instructions, Part IV). Otherwise the prior-year loss goes in Part V and cannot use the allowance.
Does an estate get the allowance?
A qualifying estate, for taxable years ending less than two years after death, can use it for rental real estate the decedent actively participated in, reduced by the surviving spouse's allowance (IRC 469(i)(4)).
Related
- Form 8582 explained
- Suspended passive losses: the complete guide
- Real estate professional status
- Passive loss carryover
- All passive loss guides
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Hans Goldstein is an Enrolled Agent, admitted to practice before the Internal Revenue Service. Not affiliated with or endorsed by the IRS. He is not a CPA or attorney. Education only, not tax or legal advice for your situation.