Passive Activity Loss Rules

The passive activity loss rules may limit the amount of losses you can deduct. These rules apply to losses in Parts I, II, and III, and line 40 of Schedule E.

Losses from passive activities may be subject first to the at-risk rules. Losses deductible under the at-risk rules are then subject to the passive activity loss rules.

You can deduct losses from passive activities in most cases only to the extent of income from passive activities. An exception for certain rental real estate activities (explained later) may apply.

Passive Activity A passive activity is any business activity in which you did not materially participate and any rental activity, except as explained later. If you are a limited partner, in most cases, you are not treated as having materially participated in the partnership’s activities for the year.

The rental of a real or personal property is a rental activity under the passive activity loss rules in most cases, but exceptions do apply. If your rental of a property is not treated as a rental activity, you must determine whether or not it is a trade or business activity and, if so, whether you materially participated in the activity for the year.

See the Instructions for Form 8582 to determine whether you materially participated in the activity and for the definition of “rental activity.”

See Pub. 925 for special rules that apply to rentals of:

• Substantially nondepreciable property,

• Property incidental to development activities, and

• Property related to activities in which you materially participate.

Activities That Are Not Passive Activities

Activities of real estate professionals. If you were a real estate professional for 2025, any rental real estate activity in which you materially participated is not a passive activity. You were a real estate professional for the year only if you met both of the following conditions.

• Amounts borrowed for use in the activity from a person who has an interest in the activity (other than as a creditor) or who is related under section 465(b)(3)(C) to a person (other than you) having such an interest.

Qualified nonrecourse financing. Qualified nonrecourse financing is treated as an amount at risk if it is secured by real property used in an activity of holding real property subject to the at-risk rules. Qualified nonrecourse financing is financing for which no one is personally liable for repayment and is:

• Borrowed by you in connection with the activity of holding real property (other than mineral property);

• More than half of the personal services you performed in trades or businesses during the year were performed in real property trades or businesses in which you materially participated.

• Not convertible from a debt obligation to an ownership interest; and

• Loaned or guaranteed by any federal, state, or local government, or borrowed by you from a qualified person.

Qualified person. A qualified person is a person who actively and regularly engages in the business of lending money, such as a bank or savings and loan association. A qualified person cannot be:

• Related to you (unless the nonrecourse financing obtained is commercially reasonable and on substantially the same terms as loans involving unrelated persons),

• The seller of the property (or a person related to the seller), or

• A person who receives a fee due to your investment in real property (or a person related to that person).

• You performed more than 750 hours of services during the year in real property trades or businesses in which you materially participated.

If you are married filing jointly, either you or your spouse must meet both of the above conditions without taking into account services performed by the other spouse.

A real property trade or business is any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business. Services you performed as an employee are not treated as performed in a real property trade or business unless you owned more than 5% of the stock (or more than 5% of the capital or profits interest) in the employer.

If you qualify as a real estate professional, rental real estate activities in which you materially participated are not passive activities. For purposes of determining whether you materially participated in your rental real estate activities, each interest in rental real estate is a separate activity unless you elect to treat all your interests in rental real estate as one activity. To make this election, attach a statement to your original tax return that

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declares you are a qualifying taxpayer for the year and you are making the election under section 469(c)(7)(A). The election applies for the year made and all later years in which you are a real estate professional. You can revoke the election only if your facts and circumstances materially change.

If you did not make this election on your timely filed

TIP return, you may be eligible to make a late election to

treat all your interest in rental real estate as one activity. See Rev. Proc. 2011-34, 2011-24 I.R.B. 875, available at IRS.gov/irb/2011-24_IRB#RP-2011-34

If you were a real estate professional for 2025, complete Schedule E, line 43.

Other activities. The rental of a dwelling unit that you used as a home is not subject to the passive loss limitation rules. See Line 2 , later, to see if you used the dwelling unit as a home.

A working interest in an oil or gas well you held directly or through an entity that did not limit your liability is not a passive activity even if you did not materially participate.

Royalty income not derived in the ordinary course of a trade or business reported on Schedule E in most cases is not considered income from a passive activity.

For more details on passive activities, see the Instructions for Form 8582 and Pub. 925.

Exception for Certain Rental Real Estate Activities

If you meet all of the following conditions, your rental real estate losses are not limited by the passive activity loss rules, and you do not need to complete Form 8582. If you do not meet all of these conditions, see the Instructions for Form 8582 to find out if you must complete and attach Form 8582 to figure any losses allowed.

1. Rental real estate activities are your only passive activities.

2. You do not have any prior-year unallowed losses from any passive activities.

3. All of the following apply if you have an overall net loss from these activities.

a. You actively participated (defined later) in all of the rental real estate activities.

b. If married filing separately, you lived apart from your spouse all year.

c. Your overall net loss from these activities is $25,000 or less ($12,500 or less if married filing separately).

d. You have no current or prior-year unallowed credits from passive activities.

e. Your modified adjusted gross income (MAGI) is $100,000 or less ($50,000 or less if married filing separately). For a definition of MAGI, see Special $25,000 allowance in Pub. 925. Also, see Line 6 in the Instructions for Form 8582.

f. You do not hold any interest in a rental real estate activity as a limited partner or as a beneficiary of an estate or a trust.

Active participation. You can meet the active participation requirement without regular, continuous, and substantial involvement in real estate activities. But you must have participated in making management decisions or arranging for others to provide services (such as repairs) in a significant and bona fide sense. Such management decisions include:

• Approving new tenants,

• Deciding on rental terms,

• Approving capital or repair expenditures, and

• Other similar decisions.

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You are not considered to actively participate if, at any time during the tax year, your interest (including your spouse’s interest) in the activity was less that 10% by value of all interests in the activity. Except as provided in regulations, limited partners aren’t treated as actively participating in a partnership’s rental real estate activities.

Recordkeeping You must keep records to support items reported on Schedule E in case the IRS has questions about them. If the IRS examines your tax return, you may be asked to explain the items reported. Good records will help you explain any item and arrive at the correct tax with a minimum of effort. If you do not have records, you may have to spend time getting statements and receipts from various sources. If you cannot produce the correct documents, you may have to pay additional tax and be subject to penalties.