🏠💸 What’s My Maximum Rental Loss Deduction? (Can I Deduct All This Pain?)

🧑‍💼 A Question from Peter in Texas:

"My wife and I have an AGI under $100,000 each year. We have a rental property and carryover rental loss of over $50,000. Our rental income is $10,000 annually. How do carryover losses work? I have heard that I can claim $25,000 from the carryover and $10,000 in current losses. Is this correct?"

🤓 Answer: Great Question, Peter. Let's Make This Easy.

Ah, rental losses—aka the tax deduction version of a participation trophy. You spend all this money on repairs, property management, and tenant-friendly upgrades, and the IRS says, “Cool story, you can deduct... some of it.” 🙃

Let’s break this down, one step at a time—minus the IRS jargon and with a side of humor.

📉 The Basics: What Even Is the $25,000 Rule?

If you actively participate in your rental activity and your adjusted gross income (AGI) is $100,000 or less, you’re allowed to deduct up to $25,000 in passive rental losses per year against your non-passive income (like your W-2 or self-employment income).

🎯 Translation: If you qualify, Uncle Sam says, “Sure, go ahead and write off up to $25,000 in rental losses. But no more than that—unless you're selling the property or your AGI is super low.”

📈 But Wait—What If You’ve Got Losses Coming Out of Your Sheetrock?

Carryover losses happen when:

• You had more than $25K in losses in previous years, or

• You made too much money that year to take the full deduction

Your losses don’t disappear—they just wait. Patiently. Like a dog hoping you'll drop your sandwich.

So, Peter, with $50,000+ in carryover losses, here’s what happens next…

🧮 Example Time: Let’s Crunch the Numbers Like Croutons

Let’s say your rental earns $10,000 in income and racks up $20,000 in expenses this year.

• $10,000 income - $20,000 expenses = $10,000 current loss

• You also have $50,000 in carryover losses

So, total loss this year on paper? $60,000

But remember, the IRS says: “Whoa there, cowboy—$25,000 max deduction per year.”

So what happens?

🧾 Form 8582 steps in to limit what you can deduct:

• $25,000 is allowed (this goes on your Schedule E and reduces your taxable income)

• The remaining $35,000 gets carried over to next year like a tax doggy bag

💡 What If You Actually Make Money on the Rental?

Let’s say the rental suddenly starts behaving and brings in a $10,000 profit this year. You can still tap into that carryover loss!

Here's how:

• You use $10,000 of your carryover losses to cancel out the rental profit (so your net income = $0)

• You then apply up to $25,000 total losses for the year

• That leaves you with a remaining $15,000 of unused carryover losses

📉 Bottom line: $25,000 per year max, whether it’s from carryover, current-year loss, or a combination.

🚧 Common Mistake: “Can I Deduct My Current-Year Loss in addition to the $25K?”

Sorry, nope. The $25,000 limit includes everything—your current-year loss and any carryover losses. They’re not stackable like pancakes at IHOP.

So, if your current loss is $10,000, that leaves only $15,000 of your carryover losses you can use this year. The other $35,000? Back into the fridge it goes until next year.

📅 When Do You Get to Use It All?

When you sell the property. That’s when the IRS lets you unleash the full carryover Kraken. Until then, you’re stuck playing the annual deduction waiting game.

✅ Recap for Peter (and Every Other Landlord Wondering the Same Thing)

• You can deduct up to $25,000/year in passive rental losses if your AGI is $100K or less

• Carryover losses wait patiently until you have room to use them, or you sell the property

• You can’t deduct both $25K in carryover and $10K in current loss—it’s combined

• Form 8582 is the boss that tells you how much you can claim

💬 Still Confused?

Don’t worry—rental losses confuse everyone. If you want to be sure you're maximizing your deductions without getting IRS side-eye...

👉Click here to book a call with Lisa Brugman EA & Associates
Let’s turn that rental loss into a tax win.