I lost money on my rental property in 2025. Can I deduct that loss against my W-2 income?

Rental property losses are classified as passive activity losses (PALs) by the IRS, which means they generally can only offset passive income — not your W-2 wages or other non-passive income. However, there is a critical exception that lets many landlords deduct up to $25,000 in rental losses against ordinary income each year.

### The $25,000 Rental Loss Allowance

If you actively participate in managing your rental property, you can deduct up to $25,000 of net rental losses against your non-passive income (such as W-2 wages). This allowance phases out based on your Modified Adjusted Gross Income (MAGI):

For example, if your MAGI is $120,000, your allowance is reduced by $10,000 — so you can deduct up to $15,000 in rental losses against your wages.

### What Is "Active Participation"?

The IRS sets a low bar for active participation. You qualify if you:

• Make management decisions yourself (approving tenants, setting rent, authorizing repairs)
• Own at least a 10% interest in the property

You do not need to manage the property day-to-day. Even hiring a property manager and reviewing their work qualifies.

### What If I Exceed the $150,000 MAGI Threshold?

Your rental losses are not lost permanently — they are suspended and carried forward to future tax years. You can use them to offset:

• Future passive income from any passive activity (rental income from other properties, limited partnership income)
• The full rental loss in the year you sell or dispose of the property (triggering a "complete disposition" that releases all suspended losses at once)

### Real Estate Professional Exception

If you qualify as a real estate professional under IRC §469(c)(7), your rental activities are treated as non-passive, and you can deduct unlimited rental losses against ordinary income regardless of MAGI. To qualify:

• More than half of your personal services during the year are in real property trades or businesses in which you materially participate, AND
• You perform more than 750 hours of services in those real estate activities

This is a high bar, typically only met by full-time real estate investors or agents.

### How to Report on Your Return

Report all rental income and expenses on Schedule E (Form 1040), Part I. Common deductible expenses include:

• Mortgage interest (Schedule E, not Schedule A)
• Property taxes
• Insurance
• Repairs and maintenance
• Depreciation (required — typically 27.5 years for residential rental property)
• Property management fees
• Professional services (accountant, attorney)
• Travel for property management

If your losses are limited by the passive activity rules, complete Form 8582 to calculate the allowable deduction. Any suspended losses are carried forward automatically each year.