Investors & landlords

from IRS PUB 527

In most cases, all rental real estate activities
(except those of certain real estate professionals, discussed later) are passive activities. For
this purpose, a rental activity is an activity from which you receive income mainly for the use of
tangible property, rather than for services. For a discussion of activities that aren’t considered
rental activities, see Rental Activities in Pub. 925.
Deductions or losses from passive activities are limited. You generally can’t offset income,
other than passive income, with losses from passive activities. Nor can you offset taxes on
income, other than passive income, with credits resulting from passive activities. Any excess
loss or credit is carried forward to the next tax year. Exceptions to the rules for figuring passive
activity limits for personal use of a dwelling unit and for rental real estate with active participation are discussed later. 
For a detailed discussion of these rules, see Pub. 925.
Real estate professionals. If you are a real estate professional, complete line 43 of Schedule E.
You qualify as a real estate professional for the tax year if you meet both of the following requirements.
• More than half of the personal services you perform in all trades or businesses during
the tax year are performed in real property trades or businesses in which you materially participate.
• You perform more than 750 hours of services during the tax year in real property
trades or businesses in which you materially participate.
If you qualify as a real estate professional, rental real estate activities in which you materially participated aren’t passive activities. For purposes of determining whether you materially
participated in your rental real estate activities, each interest in rental real estate is a separate
activity unless you elect to treat all your interests in rental real estate as one activity.
Don’t count personal services you perform as an employee in real property trades or businesses unless you are a 5% owner of your employer. You are a 5% owner if you own (or are considered to own) more than 5% of your employer's outstanding stock, or capital or profits interest. Don’t count your spouse's personal services
to determine whether you met the requirements listed earlier to qualify as a real estate professional. However, you can count your spouse's participation in an activity in determining if you
materially participated.
Real property trades or businesses. A real property trade or business is a trade or
business that does any of the following with real property.
• Develops or redevelops it.
• Constructs or reconstructs it.
• Acquires it.
• Converts it.
• Rents or leases it.
• Operates or manages it.
• Brokers it.
Choice to treat all interests as one activity. If you were a real estate professional and had
more than one rental real estate interest during the year, you can choose to treat all the interests as one activity. You can make this choice for any year that you qualify as a real estate
professional. If you forgo making the choice for one year, you can still make it for a later year.
If you make the choice, it is binding for the tax year you make it, and for any later year that
you are a real estate professional. This is true even if you aren’t a real estate professional in
any intervening year. (For that year, the exception for real estate professionals won’t apply in
determining whether your activity is subject to the passive activity rules.)
See the Instructions for Schedule E for information about making this choice.
Material participation. Generally, you materially participated in an activity for the tax year if
you were involved in its operations on a regular, continuous, and substantial basis during the
year. For details, see Pub. 925 or the Instructions for Schedule C.  Participating spouse. If you are married,
determine whether you materially participated in an activity by also counting any participation in
the activity by your spouse during the year. Do this even if your spouse owns no interest in the
activity or files a separate return for the year. Form 8582. You may have to complete Form
8582 to figure the amount of any passive activity loss for the current tax year for all activities
and the amount of the passive activity loss allowed on your tax return. See Form 8582 not required, later in this chapter, to determine if you must complete Form 8582. If you are required to complete Form 8582
and are also subject to the at-risk rules, include the amount from Form 6198, line 21 (deductible
loss), in column (b) of Form 8582, Worksheet 1 or 3, as required.

Exception for Rental Real Estate With Active Participation
If you or your spouse 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. Similarly, you may be able to offset credits from the activity against the tax on up to $25,000 of nonpassive income
after taking into account any losses allowed under this exception.

Active participation. You actively participated in a rental real estate activity if you (and your
spouse) owned at least 10% of the rental property and you made management decisions or
arranged for others to provide services (such as repairs) in a significant and bona fide sense.
Management decisions that may count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and other similar decisions.

even with active participation,  the maximum special loss allowance may be limited

The maximum special allowance is:
• $25,000 for single individuals and married
individuals filing a joint return for the tax
year,
• $12,500 for married individuals who file
separate returns for the tax year and lived
apart from their spouses at all times during
the tax year, and
• $25,000 for a qualifying estate reduced by
the special allowance for which the surviving spouse qualified.
If your modified adjusted gross income
(MAGI) is $100,000 or less ($50,000 or less if
married filing separately), you can deduct your
loss up to the amount specified above. If your
MAGI is more than $100,000 (more than
$50,000 if married filing separately), your special allowance is limited to 50% of the difference
between $150,000 ($75,000 if married filing
separately) and your MAGI.
Generally, if your MAGI is $150,000 or more
($75,000 or more if you are married filing separately), there is no special allowance.