Passive activity loss
A passive activity loss is a loss from a business you do not materially take part in, or from a rental. It can generally offset only passive income, and the excess carries forward.
Taxpayers who actively take part in a rental can deduct up to $25,000 of rental losses against other income, phased out between $100,000 and $150,000 of modified AGI. Real estate professionals who meet the hours tests are not limited.
Example. Lily has $9,000 of rental loss, actively manages the rental and has $90,000 of modified AGI, so she deducts the full $9,000 against her wages.
By Binod Raj Singh, CPA (licensed in Montana) · Updated for the 2026-2027 exam windows · Last updated 2026-11-05