Form 8582 Passive Loss Calculator (2026): $25,000 Allowance

The rule in one paragraph, from the statute

A rental is passive by default, and section 469(a) disallows the “passive activity loss”, which section 469(d)(1) defines as the amount by which “the aggregate losses from all passive activities for the taxable year” exceed “the aggregate income from all passive activities”. Section 469(b) says the disallowed amount “shall be treated as a deduction or credit allocable to such activity in the next taxable year.” The exception investors meet most often is section 469(i): for a natural person, subsection (a) does not apply to the loss from “all rental real estate activities with respect to which such individual actively participated”, up to $25,000, reduced by 50% of adjusted gross income (computed under the rules in 469(i)(3)(E)) over $100,000. The IRS calls that adjusted figure modified adjusted gross income, MAGI. Publication 925 says the rules “don’t apply to grantor trusts, partnerships, and S corporations directly”, but “they do apply to the owners of these entities”, which is why the test is run on your return and not the fund’s.

The neighbours of this topic are covered in our guides to who counts as a real estate professional, how rental income is taxed, and how to read each Schedule K-1 box. This page does the arithmetic those pages stop short of.

The allowance at each income level

The formula on the form: line 7 is $150,000 minus MAGI; line 8 is 50% of line 7, not more than $25,000; line 9 is the smaller of your net rental loss (line 4) and line 8. The same result in table form, our arithmetic from the form’s lines:

The $120,000 row matches the IRS’s own example in Publication 925 (2025): a single taxpayer with $120,000 of salary and a $31,000 rental loss “can deduct only $15,000” of the loss, carrying $16,000 forward to 2026. For a married person filing separately and living apart all year, the statute substitutes $12,500 and $50,000 for $25,000 and $100,000 (469(i)(5)); the Form 8582 instructions put the phase-out at $50,000 to $75,000. A married person filing separately who lived with a spouse at any time during the year gets no allowance.

What goes into MAGI. Line 6 starts from adjusted gross income and, per the instructions, does not count any passive activity loss, a rental loss allowed to a real estate professional, taxable Social Security, deductible traditional IRA contributions, the deductible part of self-employment tax or the student loan interest deduction, among others. It does include portfolio income and, in the year you sell, “any overall loss from the entire disposition of a passive activity (considered a nonpassive loss)”. That last point is why a big sale year can move MAGI.

Worked example: three incomes, the same $30,000 loss

The setup (our assumptions, not typical figures): you own a rental in which you actively participate and it loses $30,000 for the year. A different passive activity, such as a K-1 with Box 2 income, earns $10,000. No prior-year suspended losses. The three columns change only line 6.

Read the table as follows (all our arithmetic). Passive income comes first: the $10,000 of income absorbs $10,000 of the loss with no allowance needed. The allowance then covers the remaining $20,000 only as far as line 8 allows: all of it at $90,000, $12,500 at $125,000, none at $160,000. The last two rows are the trap for fund investors: when the same loss is a limited-partner interest, Part II is not available, so only the $10,000 of passive income frees any of it, at every income level.

When several activities lose, the Form 8582 instructions allocate by ratio: each activity’s loss is divided by the total of all the losses (Parts VI and VII), and the allowed or unallowed amount is spread the same way. With one loss activity, the whole carryforward belongs to it.

Who actually gets the $25,000

A note on DSTs: a grantor trust is not itself subject to the passive rules, so the question moves to the investor’s return. We found nothing in the documents above that says a DST beneficiary is or is not an active participant; that turns on the trust agreement and what the sponsor reports, so we leave it to the sponsor’s tax statement and your preparer.

Suspended loss ledger 1: a limited-partner K-1 over three years

This ledger follows one limited-partner interest, “Fund A”, from first loss to sale. Assumptions are ours: basis and at-risk amounts are large enough that every loss reaches Form 8582, and Fund A is your only loss activity. In 2027 you also have passive income from another K-1, “Fund B”.

Our arithmetic, in order. 2026: no passive income and no allowance for a limited partner, so the $30,000 is carried. 2027: current loss $12,000 plus $30,000 carried is $42,000 against $5,000 of Fund B income; line 2d is a $37,000 loss, line 10 is $5,000, line 11 is $5,000, and $37,000 is carried. 2028: following Example 2 in the Form 8582 instructions, you combine the $20,000 gain with the $8,000 current loss and the $37,000 carried loss; the result is an overall loss of $25,000, so “none of the amounts are entered on Form 8582” and the whole $45,000 is allowed, entered on Schedule E, Part II, column (i), with the gain on Form 8949. Net effect in the sale year: a $25,000 ordinary loss and no tax on the gain (our arithmetic; basis, at-risk and Form 461 still apply). The related-party row shows the contrast: section 469(g)(1)(B) holds the loss back until the interest is acquired by someone who is not related, so only the gain’s $20,000 of passive income frees losses.

Two cautions the instructions give. A sale of less than the entire interest releases nothing: “A disposition of less than substantially all of an entire interest doesn't trigger the allowance of prior-year unallowed losses.” And a fund that sells one of its properties has not disposed of your interest; the gain reaches you as passive income on the K-1, which can absorb suspended losses (our reading), but the carryforward stays until your own entire interest is disposed of.

Suspended loss ledger 2: an active owner whose income falls

Same rules, different person: an individual who owns 100% of a rental and makes the management decisions, with no passive income. The loss is $30,000 in 2026 and $5,000 in 2027. MAGI is $125,000 in 2026 and $90,000 in 2027.

In 2027 the carried $17,500 and the new $5,000 total $22,500, below the $25,000 allowance at MAGI of $90,000, so everything is used (our arithmetic). The carryforward helps only if your later income is lower or your later passive income higher, which is a planning question for a preparer with your numbers.

Where each number lands on the return

When you can skip Form 8582. The Schedule E instructions and the Form 8582 instructions list the same exception: rental real estate with active participation is your only passive activity, you have no prior-year unallowed losses, your total loss is not more than $25,000, your MAGI is not more than $100,000, you have no passive credits, and you do not hold an interest “as a limited partner or as a beneficiary of an estate or a trust”. Box 2 of the K-1 repeats those conditions in a list of eight, and the last is that the interest “wasn't held as a limited partner.” A limited-partner Box 2 loss therefore needs the form.

Form 8582-CR handles passive credits such as the low-income housing or rehabilitation credit. It is not needed for a simple loss, but a passive credit also blocks the shortcut above.

How this interacts with real estate professional status and the excess business loss limit

Real estate professional status (section 469(c)(7)). A taxpayer who meets both tests, “more than 750 hours of services during the taxable year in real property trades or businesses in which the taxpayer materially participates” and more than one-half of personal services in those businesses, has rentals that are not treated as passive, so Form 8582 does not limit those losses. The statute adds that this does not affect whether the taxpayer materially participates in a limited partnership interest as a limited partner; the Partner’s Instructions say a limited partner must meet material participation test 1, 5 or 6 (more than 500 hours, five of the prior ten years, or three prior years in a personal service activity). Line 6 of Form 8582 also takes a real estate professional’s allowed rental loss out of MAGI. The tests, the grouping election and 20 Tax Court cases are on our real estate professional status page.

Excess business loss limit (section 461(l)). Once a loss survives basis, at-risk and Form 8582, it can meet one more cap. The Form 461 instructions put the order as “First, apply the at-risk rules; next, apply the passive activity loss rules; and then apply the excess business loss rules.” The excess is the part of business deductions above business income plus a threshold; for taxable years beginning in 2026 Rev. Proc. 2025-32 sets it at $256,000, or $512,000 for joint returns. Section 461(l)(2) treats a disallowed amount as a net operating loss carried to later years. In the Cornell text of section 461 we read on October 19, 2026, the notes say P.L. 119-21 (section 70601) strikes the 2029 end date for years beginning after December 31, 2026, so the limit is not scheduled to end after 2026. Our reading: a suspended passive loss is not an excess-business-loss item until the year it is allowed; if Form 8582 allows it, it joins that year’s business deductions in the Form 461 test.

What a K-1 investor can do with this

• Find out which bucket each loss is in before you model a deduction. If the interest is an LP unit, assume the loss is suspended until it meets passive income or a full disposition, whatever your MAGI.
• Keep a one-line ledger per K-1 each year: current Box 1, 2 or 3 amount, carried loss in, passive income absorbed, allowed, carried loss out. It should match Part VII of last year’s Form 8582.
• Ask the fund for its property-level sales plan. A property sale inside the fund creates passive gain that can absorb suspended losses; a sale of your units to an unrelated buyer can release all of them.
• If you are near $100,000 to $150,000 of MAGI, see how a Roth conversion, a sale or an RMD moves line 6 before year end; each $2 of MAGI in the band costs $1 of allowance (our arithmetic).
• Check that last year’s carryforward is entered in your preparer’s software; the Form 8582 instructions take the prior-year amounts from Part VII of last year’s form.
• Pair this with the neighbouring limits: bonus depreciation and a cost segregation study create the paper losses that this form then suspends; depreciation recapture and the net investment income tax are the other side of a sale; and K-1 versus 1099-DIV explains why only some funds produce this problem.

This is analysis of public documents, not investment, legal or tax advice. Whether a loss is passive, whether you actively participated and which year a carryforward belongs to depend on facts only a preparer with your return can check.

FAQ

Sources, read and saved on October 19, 2026: 26 U.S.C. 469 and 461 (Cornell LII, with Notes); 26 CFR 1.469-2T and 1.469-5T (Cornell LII); IRS Publication 925 (2025); Instructions for Form 8582 (2025, dated November 26, 2025) and Form 8582 (2025); Instructions for Form 461 (2025); Instructions for Schedule E (Form 1040) (2025); Partner's Instructions for Schedule K-1 (Form 1065) (2025); Rev. Proc. 2025-32; Rev. Rul. 2004-86. Amounts labelled “our arithmetic” are ours and use the assumptions stated beside them.