You are correct that income from a rental property is passive. You don't tell me what your salary is or what you AGI is, but I am guessing since TurboTax is showing an offset of ordinary income it is because you qualify for one of the exceptions to the passive income rules which state:
Exceptions to Passive Loss Rules
There are only two exceptions to the passive loss ("PAL") rules:
- you or your spouse qualify as a real estate professional, or
- your income is small enough that you can use the $25,000 annual rental loss allowance.
Property owners with modified adjusted gross incomes of $100,000 or less may deduct up to $25,000 in rental real estate losses per year if they "actively participate" in the rental activity. You actively participate if you are involved in meaningful management decisions regarding the rental property and have more than a 10% ownership interest in the property. This allowance is phased out for taxpayers whose MAGI exceeds $100,000 and eliminated entirely when it exceeds $150,000. Thus, it is useless for high-income landlords.
