What Is a Passive Activity Loss?

A passive activity loss is a loss from a business you don't materially participate in — and, by default, from any rental you own however involved you are. It can generally only be set against passive income, not against your salary.

Rental property is treated as passive by default, whatever your involvement. That's why a rental can lose money on paper and make no difference at all to your tax bill.

The loss isn't forfeited. It's suspended and carried forward, waiting for either passive income in a later year or the year you sell it outright. You get it eventually — just not when you expected.

Why rentals produce losses in the first place

Often because of depreciation, which is a deduction you never actually pay. A property that puts cash in your pocket every month can still show a loss on the return, which makes the suspension feel doubly strange.

The exception most landlords qualify for

If you actively participate — a low bar, meaning you make the management decisions like approving tenants, setting rents and agreeing repairs — you can deduct up to $25,000 of rental loss against ordinary income.

It shrinks by 50% of every dollar of income above $100,000, so it tapers away for higher earners, and it's $12,500 if you're married filing separately and lived apart all year.

The two ways out

Short-term rentals. If the average guest stay is 7 days or fewer and you materially participate, the activity isn't a rental activity at all — and the loss becomes non-passive, so the phase-out above doesn't apply.

Real estate professional status, which achieves the same thing but has much harder tests.

Where to read more

The full explanation, and which route applies to you, is in your rental lost money and you still can't deduct it. Our qualifier will tell you which are open.