What's the Difference Between Active and Passive Rental Income?

Rental income is generally treated as passive income by the IRS, but some landlords qualify to treat it as active income, which changes how losses are handled. For most rental property owners, losses from a rental (like when expenses exceed rent collected) can only offset other passive income — they can't be used to reduce wages or other active income. However, there's a limited exception: if your adjusted gross income is under $100,000 and you actively participate in managing the property (approving tenants, setting rents, etc.), you can deduct up to $25,000 in rental losses against your regular income. Real estate professionals who spend more than half their working time and over 750 hours per year in real estate activities can treat rental income as active, allowing losses to offset any type of income without limit. Short-term rentals may be treated differently if you provide substantial services to guests.