The § 469(i) special allowance is the most widely used carve-out from the passive loss rules, permitting up to $25,000 of rental real estate losses against non-passive income on an active participation standard, far less demanding than material participation.
The two gating requirements
Under § 469(i): (1) active participation, a bona fide involvement in management decisions (approving tenants, setting terms, approving expenditures), arranging for others to provide services in a significant and bona fide sense; and (2) a 10% ownership floor per § 469(i)(6) (the taxpayer's interest, plus spouse's, must be at least 10% by value). Active participation, unlike material participation, has no hours test.
The phase-out
The $25,000 allowance reduces by 50% of MAGI over $100,000, fully phased out at $150,000 MAGI. Married filing separately (living apart all year) gets a $12,500 maximum phasing out between $50,000 and $75,000; MFS living together at any point gets zero.
Mechanics and reporting
Computed on Form 8582 (Part II isolates the rental real estate allowance). The allowance is distinct from, and available without, real estate professional status under § 469(c)(7), but a taxpayer who clears REPS and materially participates escapes the $25,000 cap entirely.
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- IRC § 469(i)$25,000 offset for rental real estate activities
- IRC § 469(i)(3)Phase-out of exemption
- IRC § 469(i)(6)Active participation
- Form 8582Passive Activity Loss Limitations
