“$25,000 Allowance” Special Rental Real Estate IRS Rule
The IRS has a "$25,000 Allowance" special rental real estate rule that applies to taxpayers in certain situations. Eligibility criteria can be found listed below.
A special rule allows aggregate losses from rental real estate activities up to $25,000 per year (IRC Sec 469(i)). To qualify, a taxpayer must be an ACTIVE PARTICIPANT in the activity. This is a less stringent test than for material participation. It means that the taxpayer must participate in management decisions, and at least arrange for others to provide the necessary services such as repairs. DO NOT CONFUSE THESE RULES WITH EARLIER STANDARDS FOR MATERIAL PARTICIPATION. Moreover, keep the following in mind:
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Less than 10% ownership is presumed to not be active participation.
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Limited partners are not active participants, unless they meet the tougher material participation standards.
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Different years: TAXPAYER must be an active participant BOTH in the year of loss AND in the year the loss is allowed.
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Phase out of the allowance applies as AGI (without regard to passives) exceeds $100,000. The phase out is 50 cents for each $1 of income over $100,000. No allowance is allowed at gross income of $150,000 and over. Phase out applies to gross income without taking into account passives, taxable Social Security benefits, or deductions for IRA. For married separate, taxpayers must live apart the entire year or they get no relief under this rule. If they lived apart all year, the allowance is $12,500, and phase out begins at income of $50,000.