What this line means
Your net income or loss for each rental property, calculated by subtracting total expenses (line 20) from rents received (line 3) and/or royalties received (line 4). A positive number is rental income. A negative number is a rental loss — but that loss is not automatically deductible. Rental losses are subject to passive activity loss rules, and you need Form 8582 to determine how much (if any) of the loss you can deduct in the current year.
Does this apply to you?
- You calculated total expenses for a rental property and need to determine net income or loss
- You have a rental loss and need to know whether passive activity rules limit your deduction
- You own multiple properties and each has a separate income or loss calculation
Easy to overlook
Rental losses up to $25,000 are deductible if you actively participate If your modified adjusted gross income (MAGI) is under $100,000 and you actively participate in managing the rental (approving tenants, setting rent, approving repairs), you can deduct up to $25,000 in rental losses against your other income. This special allowance phases out between $100,000 and $150,000 MAGI, reducing by $1 for every $2 over $100,000. Above $150,000, the entire allowance disappears. 1 IRS Schedule E instructions — Line 21
Passive losses you cannot deduct this year carry forward If your rental loss exceeds what you can deduct under the passive activity rules, the unused loss carries forward to future years. It offsets rental income in later years or is fully deductible in the year you dispose of the property in a taxable transaction. Do not discard unused losses — track them on Form 8582 each year. 2 IRS Publication 925 — Passive Activity and At-Risk Rules
Watch out for this
Deducting the full rental loss without checking passive activity limits. Most rental activity is passive by default. Unless you qualify as a real estate professional (750+ hours in real estate activities and more time in real estate than all other occupations), your rental losses are limited by the passive activity rules. Entering the full loss on your return without filing Form 8582 triggers an adjustment when the IRS catches the excess deduction.
Footnotes
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IRS Publication 925, Passive Activity and At-Risk Rules, Special $25,000 Allowance. https://www.irs.gov/pub/irs-pdf/p925.pdf ↩
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IRS Publication 925, Passive Activity and At-Risk Rules, Carryover of Disallowed Losses. https://www.irs.gov/pub/irs-pdf/p925.pdf ↩