Rental real estate is a passive activity under IRC §469, so a paper loss from depreciation cannot normally offset your W-2 salary. The one exception is the $25,000 special allowance, which phases out completely between $100,000 and $150,000 of MAGI. This calculator shows how much of your loss is deductible now, and how much gets suspended and carried forward.
Active participation is a low bar: you must own at least 10% and be involved in decisions like tenant approval and repairs. It does not require the 500-hour "material participation" test that real-estate professionals must meet.
| Scenario | Net Rental | Loss Deductible | Suspended | Allowance |
|---|---|---|---|---|
| MAGI $80K, $10,800 loss | $-10,800 | $10,800 | $0 | $25,000 |
| MAGI $120K, $10,800 loss | $-10,800 | $10,800 | $0 | $15,000 |
| MAGI $135K, $10,400 loss | $-10,400 | $7,500 | $2,900 | $7,500 |
| MAGI $160K, $10,400 loss | $-10,400 | $0 | $10,400 | $0 |
| MAGI $140K, $10,400 loss + $8K passive income | $-10,400 | $10,400 | $0 | $5,000 |
Every row is computed by this page's own calculation. Compare the third and fourth rows: the identical $10,400 loss yields a $7,500 deduction at $135,000 of MAGI but zero at $160,000, where the allowance has fully phased out. The fifth row shows that other passive income absorbs the loss independently of the $25,000 allowance. Depreciation is entered as an annual figure, not derived from basis.
This is the most common surprise for new landlords. You buy a duplex, claim $12,000 of depreciation, and wind up with a $10,000 "loss" on paper — but your refund doesn't change. The reason is §469: rental real estate is passive by default, and passive losses can only offset passive income. Your salary is not passive income.
| MAGI | Allowance Available | Practical Effect |
|---|---|---|
| $90,000 | $25,000 | Full allowance — most losses deductible |
| $100,000 | $25,000 | Phase-out begins |
| $125,000 | $12,500 | Half the allowance gone |
| $150,000 | $0 | Fully phased out — losses suspend |
Note the threshold is $100,000–$150,000 for everyone, including married couples filing jointly. A two-income household crosses it quickly, which is why so many dual-earner landlords discover their rental losses are unusable.
A disallowed passive loss is not forfeited. It is suspended and carried forward indefinitely, and it becomes fully deductible in the year you dispose of the entire interest in the activity in a taxable transaction. For many landlords, the suspended losses accumulated over a decade all land in the year of sale, which is why the tax bill on a property sale can be far lower than the headline capital gain suggests.
| Route | Requirement | Who It Fits |
|---|---|---|
| Stay under the phase-out | MAGI below $150,000 | Moderate-income landlords |
| Offset with passive income | Any passive income — other rentals, partnerships, some royalties | Landlords with a portfolio |
| Real estate professional | 750+ hours and >50% of personal services in real property trades | Full-time investors only |
The "real estate professional" designation is the highest bar and the most heavily audited. It requires more than 750 hours of service in real property businesses and that those hours exceed half of your total personal services for the year — a threshold a full-time employee cannot meet without leaving the job.
Dual-income households in high-cost metros are the classic case. Two professionals earning $80,000 each are at $160,000 of MAGI before the rental is even considered, so the $25,000 allowance is zero and every paper loss suspends. The property can still be a good investment — the loss simply cannot be used to reduce tax on wages in the current year.
Single filers in the $100,000–$150,000 band get partial relief and should plan around it. Because the allowance shrinks by 50 cents for every dollar of MAGI above $100,000, a year-end bonus or an unexpected capital gain can wipe out a deduction that was worth thousands. Deferring a Roth conversion or harvesting a loss in the same year is sometimes worth more than it first appears.
Landlords holding property through an LLC taxed as a partnership face an extra wrinkle: the passive loss limitation is applied at the partner level, not the entity level, so each partner's own MAGI and participation determine use. This is why two investors in identical shares of the same building can have very different deductible amounts.
Operating expenses reduce rental income dollar for dollar and are the first lever on Schedule E. Deductible items include mortgage interest (reported to you on Form 1098), property tax, insurance, repairs, HOA dues, property management fees, advertising, and utilities you pay. Improvements are not repairs — a new roof is capitalised and recovered through depreciation, while patching the same roof is deducted immediately.
Depreciation is the expense most often missed and most often misunderstood. Residential rental property is depreciated over 27.5 years using the straight-line method, on the building value only — land is never depreciable. A $400,000 duplex on a $100,000 lot has a $300,000 depreciable basis, or about $10,909 per year, which frequently turns a cash-flowing property into a paper loss.
Two deductions sit outside the passive-loss rules and are usable regardless of MAGI: mortgage interest and property tax on a rental are still subject to the passive rules, but the §199A qualified business income deduction may apply to rental activity that rises to the level of a trade or business. Whether a single rental qualifies is fact-specific and a frequent audit issue.
⚠️ Estimates only. This calculator models the §469 passive activity loss limitation for an individual landlord with active participation. It assumes straight-line depreciation already computed, excludes state tax, the §199A deduction, at-risk limitations, and the separate real-estate-professional rules. MAGI here means modified AGI computed without the rental loss. Rental real estate tax treatment is fact-specific — confirm with a CPA before relying on any figure.