Can rental losses offset my salary?

Up to $25,000 per year if you actively participate and your income is low enough, under §469(i). Above the phaseout, losses are suspended and carried forward.

Do I have to claim depreciation?

The building (not the land) is depreciable under §167/§168, and the IRS treats depreciation as ‘allowed or allowable’ — skip it and you still owe recapture when you sell.

Are short-term rentals reported differently?

Often yes — short-term rentals can escape the per se passive-activity rules when you materially participate, which changes where and how losses are deducted.

Schedule E

Schedule E: Rental and Royalty Income

By Paul D. Diaz, EA, MBA · Updated September 20, 2026

Schedule E reports rental real estate, royalties, and pass-through income on the 2025 Form 1040: depreciation under §167/§168, the $25,000 passive-loss allowance of §469(i), and the short-term rental exception.

Rents, royalties, and what flows where

Schedule E collects rental real estate income, royalties, and pass-through amounts from partnerships, S corporations, estates, and trusts. Rental income nets against expenses — mortgage interest, taxes, insurance, repairs, management fees — and the result flows through Schedule 1 to Form 1040. Royalties for intellectual property and mineral interests report here too, unless you are in the business of creating them.

Depreciation and the passive-loss limits

The building — never the land — is depreciable under §167/§168, and depreciation is often what turns a cash-flowing rental into a paper loss. Rental real estate is generally passive under §469, so losses cannot freely offset wages; but §469(i) lets active participants deduct up to $25,000 of rental losses against ordinary income, subject to an income phaseout, with the excess suspended and carried forward. For the full income-reporting walkthrough, see Chapter 2: Income.

The short-term rental note

Short-term rentals — think vacation and Airbnb-style properties — can escape the per se passive-activity rules when the owner materially participates in the operation. That changes where and how losses are deducted, so document your hours and involvement from day one.

From the practice: Rental income done right — Chapter 2 →

Questions, answered

Can rental losses offset my salary?: Up to $25,000 per year if you actively participate and your income is low enough, under §469(i). Above the phaseout, losses are suspended and carried forward.
Do I have to claim depreciation?: The building (not the land) is depreciable under §167/§168, and the IRS treats depreciation as ‘allowed or allowable’ — skip it and you still owe recapture when you sell.
Are short-term rentals reported differently?: Often yes — short-term rentals can escape the per se passive-activity rules when you materially participate, which changes where and how losses are deducted.

Keep reading: Total Income · AGI · Schedule D Capital

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