Passive Activity Loss Rules for Foreign Rental Property

Rental activities are generally passive activities under US tax law, meaning losses can only be deducted against other passive income, not against wages or investment income, unless you qualify as a real estate professional or meet the $25,000 rental loss allowance for active participants. The passive activity rules apply equally to foreign rental properties and US ones, so if your foreign rental generates a loss, that loss is typically suspended and carried forward until you have passive income to absorb it or you sell the property. Real estate professionals who spend more than half their working time and at least 750 hours per year in real estate activities can deduct rental losses without the passive limitation, and that rule applies to foreign properties too. The $25,000 allowance for active participants phases out for taxpayers with modified AGI above $100,000 and disappears entirely above $150,000, regardless of whether the rental is in the US or abroad. When you sell a foreign rental property, any accumulated suspended passive losses from that property are released and become fully deductible in the year of sale, offsetting part or all of the gain from the sale.