IRS Form 8582 (Passive Activity Loss) - Special Allowance Limits for Rental Real Estate

Rental real estate activities are "per se" passive activities. If a taxpayer actively participates in the rental real estate activity, and the activity operates at a net taxable loss for the period, the taxpayer may be able to claim the Special Allowance for Rental Real Estate activities and deduct up to $25,000 of those passive losses against nonpassive income.

In this example, we have a taxpayer with a single-family home rental property where he actively participates in the management. The taxpayer can claim the special allowance and deduct the losses against his nonpassive income. However, given the taxpayer's modified AGI, the special allowance is limited. The unallowed rental real estate losses are carried forward to the next tax year.

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