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Published July 15, 2026
Yes, up to $25,000, if your MAGI is under $100,000 and you actively participate. It phases out completely at $150,000.
If you actively participate in managing your rental (approving tenants, setting rent, signing off on repairs) and your modified adjusted gross income is under $100,000, you can generally deduct up to $25,000 of rental losses against your W-2 wages and other nonpassive income each year under Internal Revenue Code section 469(i). That allowance shrinks by 50 cents for every dollar of MAGI above $100,000 and disappears entirely at $150,000 MAGI.
Under the passive activity loss rules in IRC section 469, rental real estate is treated as a passive activity almost by default, even if you personally handle every phone call about the property. That matters because passive losses can generally only offset passive income. If your only passive activity is one rental house in Torrance that lost money this year, the loss just sits there, carried forward, instead of reducing the tax on your paycheck.
Congress carved out a specific exception for smaller-scale landlords. It is often called the "$25,000 special allowance," and it lives in section 469(i) of the tax code.
Two tests matter here, and people often confuse them with the much stricter "material participation" standard used elsewhere in the passive loss rules.
Active participation, the standard that applies to this allowance, is deliberately less demanding. IRS Publication 925 describes it as making management decisions in a significant and bona fide sense: approving new tenants, deciding on rental terms, approving capital or repair expenditures, and similar calls. There is no minimum hours requirement attached to active participation itself. You do not need to be the one fixing the garbage disposal. You do need to be the one deciding whether it gets fixed and who does the work, rather than handing every decision to a property manager with full discretion.
The second test is ownership. Under section 469(i)(6), you must own at least 10 percent of the value of all interests in the rental activity for the entire year the loss is claimed. If you and a sibling co-own a Torrance duplex 50/50 and you both make management calls, you likely both clear this bar on your own returns.
Here is where the allowance gets narrow fast. Once modified adjusted gross income passes $100,000, the $25,000 ceiling reduces by 50 percent of the excess. At $120,000 MAGI, the math is ($120,000 minus $100,000) times 50 percent, a $10,000 reduction, leaving a $15,000 allowable deduction. By the time MAGI hits $150,000, the special allowance is zero, full stop, regardless of how large the actual loss is or how involved you are in running the property.
Given South Bay household incomes, plenty of two-income owners in Torrance, Redondo Beach, and El Segundo cross $150,000 MAGI without much effort, especially once a spouse's W-2 income is added in. If that describes your household, the $25,000 allowance is off the table this year no matter how hands-on you are, and the loss instead carries forward to offset passive income (including gain on a future sale) down the road.
Before you assume a rental loss will trim your tax bill, run the MAGI numbers first. The active participation bar is low, the ownership bar is 10 percent, but the income phaseout is the thing that actually determines whether this deduction helps you at all. A loss that cannot be used this year is not lost forever. It is suspended and carries forward until you have passive income to absorb it, or until you sell the property in a fully taxable transaction, at which point suspended losses generally become fully deductible.
If you would rather have someone track the participation records and flag the phaseout math before filing season instead of discovering it in April, that is part of what we do for owners at Schofield.
This is general information, not legal or tax advice. Confirm with a licensed tax professional before you act.
Last verified: July 2026.
Topics: taxes, passive activity loss, rental deductions, IRC 469, Torrance rental property
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Schofield Properties is a family run property management company at 323 Richmond St, El Segundo, CA 90245. We have managed the South Bay since 1972 and personally oversee about 186 doors today. Book a call to talk about your property.
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