Rental activity is passive activity by definition, so rental losses are considered passive losses, and passive losses can only be deducted against passive gains. Passive losses by a real estate professional are allowed in full in the year of the loss. For all others the unallowed loss, if any, is carried forward until it used or until the entire interest in the activity is disposed of in a fully taxable transaction.
To see why losses aren't being allowed, print Form 8582. Unallowed losses will be indicated in one of the worksheets on the second page.
If the taxpayer or their spouse actively participated in a passive rental real estate activity, a special allowance of up to $25,000 ($12,500 for married filing separate filers) is allowed. The special allowance is reduced by 50% of the amount of modified adjusted gross income that is more than $100,000 ($50,000 for married filing separate filing status). If modified adjusted gross income is $150,000 or more ($75,000 or more for married filing separate filing status), the special allowance is completely phased out.
Additional Information:
IRS: Schedule E - Supplemental Income and Loss
