Rental losses for real estate activities are generally considered passive activities and the amount of loss you can deduct is limited. You can usually deduct more of a loss if you “actively” participate in your rental activity. Active participation is if you own at least 10% of the rental property and you made management decisions in a significant sense.
If your rental losses are less than $25,000 and you actively participated in the rental activity then the passive activity limits do not apply to you.
If your rental losses are more than $25,000 and you actively participated then your loss is limited to the $25,000 unless you have other passive income to offset the loss.
If you do not actively participate then any loss is deductable only to the extent that you have other passive income.
Any suspended losses due to the limits on passive activity will be released when the property is sold. Also, there is an income phase out for the $25,000 deduction limitation. If your modified AGI is $100,000 or less, then no limits apply. If your modified AGI is between $100,000 and $150,000 then this loss is limited to 50% of the difference between $150,000 and your modified AGI. If your modified AGI is more than $150,000 your cannot generally use the special allowance.
Rental loss deductions can be complicated. Make sure to contact your tax advisor to make sure you are making the most of your rental losses.