Basically, TurboTax Online misclassifies self-managed rental properties as passive activities unless the taxpayer qualifies as a Real Estate Professional or operates a short-term rental. This means that even landlords who materially participate—personally managing, maintaining, and operating their properties—are treated as passive investors. As a result, their rental losses are not only limited by the $25,000 phase-out but also suspended and effectively unusable, because the software disqualifies them from deducting those carryforward losses against active income in future years. This misapplication conflicts with IRS Publication 925 (§469(h)), which allows materially participating landlords to classify their rentals as non-passive and fully deduct legitimate losses without meeting the stricter Real Estate Professional requirements.
