A prior year unallowed loss for rental property is the amount of a loss from your rental (passive) activity that you were not allowed to deduct in the current year of the actual loss that must be carried forward until those losses are allowed.
In a rental activity, to deduct a rental loss, you must have other rental income or other passive (investment income) to apply your losses against. If you are an Active Participant - see definition below, up to $25,000 of your loss can be applied in the current year against other non-passive income like wages. Once this amount has been exhausted, then any additional loss still available is suspended until you sell or otherwise dispose of the property.
Form 8582 figures 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.
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 similar decisions.
Maximum special allowance. 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.
More information. See
Publication 925 for more information on the passive loss limits, including information on the treatment of unused disallowed passive losses and credits and the treatment of gains and losses realized on the disposition of a passive activity.
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