What Are Passive Activities and How Do They Affect Me?
Rental properties are, by definition, passive activities and are subject to passive activity loss rules. These rules are quite complex. In general, the passive activity rules limit your ability to offset other types of income with net passive losses. But the good new is there is an exception: If you actively participate in a rental activity you can deduct up to $25,000 of the rental loss. To actively participate means that you own at least 10% of the property and you make major management decisions, such as approving new tenants, setting rental terms, approving improvements, and so forth. (No, you don’t have to mow the lawn or answer middle-of-the-night phone calls from tenants about a backed-up toilet. But this exception phases out as your income rises. If you have modified adjusted gross income over $100,000, the loss you can deduct decreases by $0.50 for every dollar over $100,000. The maximum loss is completely phased out when your modified adjusted gross income reaches $150,000. (
