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Limit on Rental Losses

Rental real estate activities for which you receive income mainly for the use of tangible property rather than for services are considered passive activities. The amount of passive activity loss you can deduct from nonpassive income is limited by at-risk rules and passive activity rules.

If you used your property as a home during the year, the passive activity rules do not apply to that property. Instead, you must follow the rules explained earlier under Personal Use of A Vacation Home or Dwelling Unit.

At Risk Rules

Losses from passive activities are first subject to the at-risk-rules. These limit the amount of deductible losses from holding more real estate property placed in service after 1986. Losses from real property placed in service before 1987 are not subject to the at-risk rules.

Generally, your loss cannot exceed the amount you have at risk at the end of the tax year (the amount of your money or property you could actually lose). The amount  you have at risk includes your cash investment as well as loans for which you are personally liable. See Publication 925, Passive Activity and At-Risk Rules for more information.

Even if you are fully at risk, your loss may be limited by the passive activity limits.

Passive Activity Limits

Because rental activities are passive activities, you generally cannot offset income, other than passive income, with rental losses. Any excess loss is carried over to the next tax year. You may have to complete Form 8582, Passive Activity Loss Limitations, to figure the amount of any passive activity loss for the current year and any passive activity loss allowed on your tax return. For a detailed discussion of the passive activity rules, see Publication 952.

Real Estate Professionals

Rental activities in which you materially participated during the year are not passive activities if, for that year, you were a real estate professional.

How to qualify as a real estate professional?

To qualify as a real estate professional, the time you spend performing services in real property trades or businesses in which you materially participate must be more than half the time you spend  performing personal services in all trades or businesses and more than 750 hours. Losses from these activities are not limited by the passive activity rules.

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