There are two ways to do this:

1. invest in a rental property or other businesses that produces passive income (only businesses in which you don’t materially participate produce passive income), or.
2. sell your rental property or another passive activity you own, such as a limited partnership interest.

Can you write off passive losses?

Under the passive activity rules you can deduct up to $25,000 in passive losses against your ordinary income (W-2 wages) if your modified adjusted gross income (MAGI) is $100,000 or less.

Is the loss of a rental property a passive loss?

Losses from rental property are considered passive losses and can generally offset passive income only (that is, income from other rental properties or another small business in which you do not materially participate, not including investments).

Can a real estate professional write off passive losses?

Qualified real estate professionals can write off passive activity losses if they materially take part in the rental operations, work at least 750 hours annually in real estate, and over 50% of their work is on their real estate business. Other than these two instances, passive losses likely won’t be able to be deducted from non-passive income.

Do you have to deduct passive activity losses?

This distinction is important because the passive loss rules only allow a taxpayer to deduct “passive activity losses up to the amount of passive activity income”; the taxpayer may not deduct passive activity losses from earned income. Thus, to gain any benefit from passive activity losses, a taxpayer must have passive activity income.

How are rental losses treated by the IRS?

Under the self-rental rule, income from the rental of property for use in a trade or business in which the taxpayer materially participates is treated as nonpassive income. The courts upheld the IRS’s ruling. See the Nolo article Can You Deduct Your Rental Losses? for more information on how passive loss rules affect landlords.