A rental activity is a passive activity even if you materially participated in that activity, unless you materially participated as a real estate professional.
Per IRS Publication 925 Passive Activity and At-Risk Rules, page 4:
Phaseout rule. The maximum special allowance of $25,000 ($12,500 for married individuals filing separate returns and living apart at all times during the year) is reduced by 50% of the amount of your modified adjusted gross income that’s more than $100,000 ($50,000 if you’re married filing separately). If your modified adjusted gross income is $150,000 or more ($75,000 or more if you’re married filing separately), you generally can’t use the special allowance. This is because the special allowance is reduced to $0 since the modified adjusted gross income is over the $100,000 amount.
Modified adjusted gross income for this purpose is your adjusted gross income figured without the following.
Exceptions to the phaseout rules. A higher phaseout range applies to rehabilitation investment credits from rental real estate activities. For those credits, the phaseout of the $25,000 special allowance starts when your modified adjusted gross income exceeds $200,000 ($100,000 if you’re a married individual filing a separate return and living apart at all times during the year).
There is no phaseout of the $25,000 special allowance for low-income housing credits.
Ordering rules. If you have more than one of the exceptions to the phaseout rules in the same tax year, you must apply the $25,000 phaseout against your passive activity losses and credits in the following order.
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