What is often called the “mom-and-pop exception” is the special allowance for rental real estate activities with active participation. It can allow an eligible taxpayer to deduct up to $25,000 of rental loss against nonpassive income, subject to income and filing-status limits.
The passive-activity calculation is generally completed on Form 8582 and reported with the individual income tax return.
Active participation is the starting point
Active participation is less demanding than the material-participation standard. It can include making meaningful management decisions, such as approving tenants, setting rental terms, or authorizing repairs. A taxpayer generally must own at least 10% of the activity by value, including a spouse’s interest, throughout the year.
How the allowance phases out
The maximum allowance is generally $25,000 for a single filer or married couple filing jointly. It begins to phase out when modified adjusted gross income exceeds $100,000 and is generally eliminated at $150,000. The reduction equals 50 cents for every dollar of modified adjusted gross income above $100,000.
For married taxpayers filing separately who lived apart for the entire year, the maximum is generally $12,500 and the phaseout range is $50,000 to $75,000. A married taxpayer filing separately who lived with a spouse at any time during the year generally cannot claim the allowance.
A $25,000 rental loss does not automatically create a $25,000 current deduction. Participation, income, basis, at-risk rules, and passive-loss limits all matter.
What happens to a disallowed loss?
A passive loss that is not currently deductible is generally suspended and carried forward. It may become usable against future passive income or when the taxpayer disposes of the entire interest in the activity in a fully taxable transaction, subject to the applicable rules.
Keep the records that prove the story
- A log or calendar of management decisions and activity
- Leases, repair approvals, and communications with managers or tenants
- Purchase documents and depreciation schedules
- Income, expense, debt, and ownership records
- Prior-year passive-loss carryforward schedules
The current Form 8582 instructions and IRS Publication 925 explain the allowance and the broader passive-activity framework.
This article provides general educational information and is not tax or legal advice. Rental-loss treatment depends on ownership, participation, income, basis, at-risk limitations, and other facts.