Can my rental loss offset my salary?

Up to $25,000 if you actively participate and MAGI stays under $100,000 — phasing out by $150,000. Above that, or without participation, the loss suspends. Real estate professionals play a different game entirely.

What counts as material participation?

Any of seven tests — 500 hours, substantially all participation, 100 hours plus most, prior-year history, and others. Hours need contemporaneous logs; examiners disbelieve reconstructed calendars.

When do suspended losses finally deduct?

On a fully taxable disposition of the entire activity to an unrelated buyer — years of suspended losses release against any income that year. Installment sales and related-party transfers complicate the release.

IRC §469 · 26 U.S.C. §469

IRC §469: Passive Activity Loss Limits

By Paul D. Diaz, EA, MBA · Updated September 20, 2026

IRC §469 traps rental and passive-business losses: deductible only against passive income, with a $25,000 rental exception phasing out at higher incomes. Suspended losses wait — sometimes until sale.

What it governs

Passive losses offset passive income only — no sheltering wages or portfolio income
$25,000 rental exception for active participants, phasing out $100K–$150K
Real estate professional status escapes §469 with 750 hours and material participation
Suspended losses release in full on a taxable disposition of the activity

In the GuideFull treatment in Chapter 12 of the Guide (principal treatment) and Chapter 3 — THE TAX CUTTERY® Guide to Federal Income Taxation, Professional Edition (564 pages, 24 chapters).

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Questions this section answers

Can my rental loss offset my salary?: Up to $25,000 if you actively participate and MAGI stays under $100,000 — phasing out by $150,000. Above that, or without participation, the loss suspends. Real estate professionals play a different game entirely.
What counts as material participation?: Any of seven tests — 500 hours, substantially all participation, 100 hours plus most, prior-year history, and others. Hours need contemporaneous logs; examiners disbelieve reconstructed calendars.
When do suspended losses finally deduct?: On a fully taxable disposition of the entire activity to an unrelated buyer — years of suspended losses release against any income that year. Installment sales and related-party transfers complicate the release.

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