The general rule states that passive income cannot be offset by passive losses. Taxpayers who actively participate in rental real estate activities have an exception. If your adjusted gross income (AGI) is below $100,000, you can deduct up to $25,000 in passive losses against your non-passive income. This allowance is phased out at 50 cents per dollar above $100,000 as AGI increases. Once AGI reaches $150,000, it completely disappears, which means that no passive loss deduction is allowed beyond that point.

As an example, if the adjusted gross income is $200,000, no deduction is permitted. In other words, if the AGI is $150,000, then 50% of the $50,000 can be taken out. An individual who is actively involved in rental real estate activities can use up to $25,000 of their net income from those activities to cover other income.