J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

10.2 Rental Real Estate Loss Allowance of up to $25,000

If you are not a real estate professional (10.3) but you actively participate by performing some management role in a real estate rental venture, you may deduct up to $25,000 of a real estate rental loss against your regular, nonpassive income such as wages. Your rental loss is still “passive”, but the allowance lets you deduct the loss (up to $25,000) as if it were a nonpassive loss. The allowance is phased out if your modified adjusted gross income (MAGI) is between $100,000 and $150,000. You generally take the allowance into account on Schedule E, but Form 8582 is sometimes required (10.12).

If you are married filing separately, you are not eligible for the special loss allowance unless you lived apart for the entire year, and in that case, the allowance is limited to $12,500; see below. The allowance applies only to real estate rentals not excluded from the rental category by the rules at 10.1. For example, short-term vacation home rentals averaging seven days or less do not qualify for the allowance. The allowance applies only to real estate rentals, not to any rentals of equipment or other personal property.

A trust may not qualify for the $25,000 allowance. Thus, you may not circumvent the $25,000 ceiling or multiply the number of $25,000 allowances by transferring rental real properties to one or more trusts. However, an estate may qualify for the allowance if the decedent actively participated in the operation. The ...