Passive activity loss rules under the IRS tax code generally limit the ability of taxpayers to use losses from 'passive' activities (like most rental real estate) to offset 'active' income (like wages or business profits). Under these rules, losses from passive activities can only be used to offset income from other passive activities.
How It Applies to Florida Landlords
Most Florida landlords are considered to have passive income unless they qualify for 'Real Estate Professional' status. However, there is a special allowance that permits individual landlords to deduct up to $25,000 of passive rental losses against non-passive income, provided their modified adjusted gross income is below certain thresholds ($100,000, with a phase-out up to $150,000). To qualify, the landlord must 'actively participate' in the rental activity, such as making decisions on lease terms, approving tenants, or arranging for repairs. If a landlord's losses exceed these limits, the excess must be carried forward to future tax years.
Key Takeaways
- Passive losses are generally restricted from offsetting W-2 or business income.
- The $25,000 active participation exception is available for smaller investors.
- Real estate professional status allows for unlimited loss deductions but has strict hourly requirements.
- Unused losses can be carried forward indefinitely until they can be used.