The rental loss is automatically defined as passive loss which may not be offset against your ordinary income (such asW-2 or business income) when your adjusted gross income is over $150,000. Even your income is not to the point phasing out your deduction, you can only deduct up to $25,000 per year. The unallowed passive loss can be carried forward indefinitely. It can be deducted when the property is sold.
There is an exception to deduct 100% of your passive loss instead of carrying forward. If you work at least 750 hours AND over 50% of your working hours as real estate professional, you can deduct the rental loss as ordinary business loss instead of passive loss. One common misunderstanding is to get a real estate salesperson license so as to claim yourself as real estate professional. This is incorrect as you still need to go through the above hour-test to see determine if you can reported as real estate professional.
In order to fulfill these requirements, the good news is you can also include your real estate business on top of your rental property management time. For example, if you run a real estate development company, as long as you can pass the test of material participation, you can group the time you spent to the time managing your rental properties to see if you meet the criteria of real estate professional.
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