Real estate losses are subject to a phaseout limit under the material participation exclusion. The phaseout is based on an individuals MAGI, or Modified Adjusted Gross Income.
An individuals MAGI is used as a basis for determining whether they qualify for certain tax deductions.
Modified Adjusted Gross Income is determined without taking into account the following:
- Taxable social security benefits or equivalent tier 1 railroad retirement benefits.
- Deductible contributions to an IRA or certain other qualified retirement plans.
- The exclusion allowed for qualified U.S. savings bonds interest used to pay higher educational expenses.
- The exclusion allowed for employer-provided adoption benefits.
- Any passive activity income or loss.
- Any passive income or loss for real
- Any overall loss from a publicly traded partnership.
- The deduction for one-half of self-employment tax.
- The deduction allowed for interest on student loans.
- The deduction for qualified tuition and related expenses.
Rental Real Estate Loss Allowance of up to $25,000
If you or your spouse actively participated in a passive rental activity, you can deduct up to $25,000 of loss from the activity from your regular nonpassive income such as wages. The allowance is phased out if your modified adjusted gross income (MAGI) is between $100,000 and $150,000.
This special allowance is an exception to the general rule disallowing loses in excess of income from passive activities.
Phaseout of the Allowance