Exception for the Deductionof Rental Real Estate Losses

Taxpayers must fi rst apply rental real estate losses from
rental activities they own and actively participate in
against other non-real estate passive income for the
year. If there is still an excess passive loss generated
by the real estate rental activity, the taxpayer may
then offset up to $25,000 of passive activity losses and
credits from the activity against active income. This
exception is available only to individual taxpayers or
their estates for tax years ending less than two years
subsequent to the date of death.
This $25,000 offset is reduced or phased out as the
taxpayer’s modifi ed adjusted gross income (MAGI)
exceeds $100,000. Section 469 requires that the
$25,000 offset be reduced by 50% of the taxpayer’s
MAGI in excess of $100,000. Thus, a taxpayer with
MAGI of $150,000 or more will not be allowed to
deduct any passive rental real estate losses currently, as
the entire $25,000 will be phased out and suspended.
For the purposes of this exception, MAGI is
computed by disregarding:
• Taxable social security and Railroad Retirement
Benefi ts.
• The exclusion for qualifi ed U.S. savings bond
interest used to pay higher education expenses.
• The exclusion for employer adoption assistance
• Passive activity income or loss on Form 8582.
• Any overall loss from publicly traded partnerships.
• Rental real estate losses allowed to real estate
• Deductions for contributions to IRAs and pension
• The deduction for one-half of self-employment
taxes, interest on student loans, and higher
education expenses.
• Deductions attributable to domestic production