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If you actively participated in a passive rental real estate activity, you may be able to deduct up to $25,000 of loss from the activity from your nonpassive income. This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities.

The maximum special allowance is:
  • $25,000 for single individuals and married individuals filing a joint return for the tax year.
  • $12,500 for married individuals who file separate returns for the tax year and lived apart from their spouses at all times during the tax year.
  • $25,000 for a qualifying estate reduced by the special allowance for which the surviving spouse qualified.
Modified adjusted gross income limitation. If your modified adjusted gross income is $100,0001 or less, your loss is deductible up to the amount of the maximum special allowance referred to in the preceding paragraph. 

If your modified adjusted gross income is more than $100,0001 but less than $150,0002, your special allowance is limited to 50% of the difference between $150,0002, and your modified adjusted gross income.

Generally, if your modified adjusted gross income is $150,0002 or more, there is no special allowance.

1 $50,000 if married filing separately
2 $75,000 if married filing separately

See the IRS Instructions for Form 8582 for more information

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