Have you Experienced Rental Property Loss?
- Steve Julal
- May 9
- 2 min read
When it comes to federal income taxes, the general rule for reporting losses from rental real estate is to consider it as passive activity losses (PALs). Here’s the catch: these particular losses usually can’t be deducted unless you have income from other passive sources, like other profitable rental properties.
The Catch with Passive Losses
Many rental property owners don’t have enough (or any) passive income within a given year. When that happens, rental losses that exceed your passive income are "suspended" — meaning you can’t deduct them right away. Instead, they carry forward to future years. You can deduct those suspended losses once you have enough passive income, or when you sell the property that generated the loss.
The Real Estate Professional Exception
Fortunately, there's an important exception. If you qualify as a real estate professional, your rental losses may not be considered passive. That means you can generally deduct them immediately, regardless of passive income.
To qualify as a real estate professional for tax purposes, you must meet two key criteria:
Spend more than 750 hours during the year working in real estate activities in which you materially participate.
Those real estate hours must account for more than half of all the time you spend working during the year.
If you meet both requirements, you’re considered a real estate professional. The next step is to show that you materially participate in the rental activities themselves. Here are three common ways to prove you materially participate as a real estate professional.
Spend more than 500 hours on the activity during the year,
Spend more than 100 hours on the activity and more time on said activity than anyone else, or
Your time must make up substantially all the work done on the activity by anyone.
What If You Don’t Qualify as a Real Estate Professional?
Not everyone can meet the real estate professional standards. Thankfully, there are a few other exceptions that might allow you to deduct rental losses currently:
1. Small Landlord Exception
You can deduct up to $25,000 of rental losses as non-passive.
You must own at least 10% of the rental property.
You must actively participate, which can be as simple as making key decisions —like approving tenants or authorizing repairs.
** Note: This exception doesn’t apply to limited partnerships, and it phases out between $100,000 and $150,000 of adjusted gross income (AGI).
2. Seven-Day Rule
If the average rental period is 7 days or less, the activity is treated like a business rather than a rental.
If you meet one of the material participation tests, the losses are considered non-passive.
3. Thirty-Day Rule with Services
Applies if the average rental period is 30 days or less, and you provide significant personal services (like daily cleaning or meals).
** Again, if you materially participate, the losses are considered non-passive.
Maximize Your Tax Benefits
As you can see, there are several strategies and exceptions that can help rental property owners deduct losses sooner rather than later. Understanding how to qualify for these rules — or getting help from a tax advisor — can make a big difference in your bottom line. Contact us if you find yourself in this situation this upcoming tax season. We’d love to help you strategize ways to take advantage of PALs.
