Interpretation of 8582 Special Allowance for Rental RE Activities

Real Estate Agent · Oakland, CA · Member since 2017 · 60 posts · 25 votes

"Special Allowance for Rental Real Estate Activities

Active participation. If you actively participated in a passive rental real estate activity, you may be able to deduct up to $25,000 of loss from the activity from your nonpassive income. This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities."

What does this mean? What's the difference between "nonpassive" and active (W2) income? Is this saying that there are special cases in which up to $25,000 of passive losses can be used to deduct from a W2 income?

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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
5y
Originally posted by @David Lao:
"Special Allowance for Rental Real Estate Activities

Active participation. If you actively participated in a passive rental real estate activity, you may be able to deduct up to $25,000 of loss from the activity from your nonpassive income. This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities."

What does this mean? What's the difference between "nonpassive" and active (W2) income? Is this saying that there are special cases in which up to $25,000 of passive losses can be used to deduct from a W2 income?

Yes you can if you meet the requirements.
If you are not a real estate professional, the passive activity losses (PALs) generally are deductible only (1) against income from passive activities, (2) when the entire interest in a passive activity is disposed of in a taxable transaction, or (3) under the $25,000 rental loss privilege for qualified rental activities (subject to the $100,000 AGI phase-out).

The general is a rule allowing up to $25,000 of active participation(see below) rental real estate losses as a deduction against nonpassive income.

The taxpayer must make management decisions with regard to the property, have at least a 10% ownership share in the property, and the cannot be a limited partner. Furthermore, a spouse's ownership interest in the property is taken into account when computing the taxpayer's 10% minimum ownership interest

You will be deemed to be actively participating if you make management decisions in a significant and bona fide sense. Management decisions that are relevant in determining whether you actively participate include approving new tenants, deciding on rental terms, approving capital or repair expenditures, and other similar decisions.

There is a phase out if your MAGI is above $100,000 and completely lose the deduction once you hit $150,000.

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