Enter the deal. You'll see what it earns in year one, what you keep when you sell, and whether the same money would have done better somewhere else.
Disclaimer Educational estimate only. Not tax, legal, or financial advice.
Change any number and everything below updates.
Only matters in a year the rental loses money — which, thanks to depreciation, is most of them.
Everything above follows from these. Open any one for the plain-language version, with your own numbers where they apply.
| Route | What it needs | What you can deduct |
|---|---|---|
| The $25,000 allowance IRC 469(i) |
A rental activity, 10% ownership, and active participation | Up to $25,000 a year, shrinking to nothing between $100,000 and $150,000 of income |
| Not a rental activity Reg. 1.469-1T(e)(3)(ii) |
Average stay of 7 nights or less (or 30 with significant services), and material participation | Everything. No cap, no income phase-out, no professional status |
| Real estate professional IRC 469(c)(7) |
Over 750 hours and more than half your working time in real estate, and material participation | Everything. Rarely available to someone with a full-time job elsewhere |
Miss all three and the loss is not lost — it is suspended. It waits, offsets future rental profit, and whatever is still waiting is released in full in the year you sell.
These two get mixed up constantly, and they are not close. Active participation is a low bar that unlocks $25,000. Material participation is a high bar that unlocks everything — and it is the one both routes out of passive depend on.
You own at least 10% by value, all year, and you make bona fide, significant and genuine management decisions: approving tenants, setting rents and lease terms, approving repairs and spending, choosing the manager.
Hiring a property manager is fine. Handing them the decisions is not. A limited partnership interest never qualifies, however large.
Unlocks $25,000, income-tested.
You meet any one of seven tests. It is about hours and involvement, not ownership percentage — and there is no income phase-out anywhere in it.
Your spouse's hours count here, even filing separately. Investor-type work — reading reports, reviewing finances — does not count unless you are also involved day to day. Nor does commuting.
Unlocks the whole loss, if the activity qualifies.
Reg. 1.469-5T(a). Meet one and you are done. In practice almost everyone uses test 1, 3 or 7.
Whichever test you use, the evidence is the same: a contemporaneous log, written as you go. Calendars reconstructed after an audit letter arrives are routinely thrown out, and this is where most claims are actually lost — not on the law.
A common mix-up worth clearing up: the seven tests above are for material participation. Professional status under IRC 469(c)(7)(B) has only two hour tests — and then still needs material participation on top.
Both tests are personal to one spouse — filing jointly does not let you add your hours together. (Material participation is the opposite: there, a spouse's hours do count.)
"Real property trade or business" is defined broadly in 469(c)(7)(C): development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing and brokerage.
And once you qualify, you must still materially participate in each rental separately — unless you make the grouping election under 469(c)(7)(A) to treat them all as one activity.
Why it usually fails: test 1. A full-time job is about 2,000 hours, so you would need more than that again in real estate. This is the most litigated point in the section, and taxpayers holding a full-time job outside real estate almost always lose it.
The allowance falls 50¢ for every dollar of income over $100,000, so it is gone at $150,000. Those three figures were written into the law in 1986 and have never been adjusted for inflation — which is why they catch more people every year.
Filing separately halves all three — $12,500, phasing out from $50,000 to $75,000 — and only if you lived apart from your spouse for the whole year. Lived together at any point and the allowance is zero.
The average is across the whole year: total nights rented divided by number of bookings. Not your minimum-stay setting. A few long winter bookings can drag a summer-weekend property over the line.
| Average stay | Rental activity? | Loss route | Depreciation |
|---|---|---|---|
| 7 nights or less | No | Material participation deducts everything. Without it, nothing — there is no $25,000 fallback | 39 years |
| 8–30 nights with significant services | No | Same as above | 39 years |
| 8–30 nights without | Yes | $25,000 allowance, income-tested | 39 years |
| Over 30 nights | Yes | $25,000 allowance, income-tested | 27.5 years |
The row to avoid is the third. Eight to thirty nights without services gets you the slower 39-year depreciation and the $25,000 cap — the worst of both. Either bring the average to seven or under, or push it past thirty.
Two things the short-term route costs you. Depreciation slows: transient occupancy makes the building nonresidential, so the same basis is spread over 39 years instead of 27.5 — about 30% less deduction each year. And heavy services can move the income to Schedule C, where it picks up self-employment tax at 15.3%. That is a facts-and-circumstances test under Reg. 1.1402(a)-4(c), not automatic — and this tool does not model it.
Beat the passive rules and IRC 469 stops capping you — but IRC 461(l) still does. Total business losses you can set against non-business income in 2026:
Anything above becomes a net operating loss carried into the following year, where it can offset up to 80% of income. Deferred, not lost. In 2026 these thresholds fell — OBBBA made the limit permanent and reverted it to the original 2017 amounts, down from $313,000 / $626,000 in 2025.
You will not reach it with one property on these numbers. It bites when cost segregation and bonus depreciation are stacked on several properties in one year — none of which this tool models.
This is a plain-language summary, not advice. Every one of these rules has exceptions this page does not cover, and the facts that decide them are yours. Take it to a CPA before you file on it.
The first twelve months, line by line.
Rent comes in, the operating costs go out, then the mortgage. What is left is cash flow. The last line is tax — and on a rental that is often a saving rather than a cost, because depreciation is a deduction that costs you nothing in cash.
Depreciation is a paper deduction — it lowers your tax bill without costing cash, which is why a rental can show a loss on the return while putting money in your pocket. It comes back at sale as recapture, further down.
You put in — and walk away with —.
Everything on this page runs to the end of your holding period, which you set at the top. The loan itself runs 30 years — a different thing, and the chart above shows all of them. The loan term is in Your numbers on the left.
The columns of the amortization spreadsheet, in its order. Click a year to open its twelve payments. Accumulated principal includes your deposit, so it is the equity you own outright, not only the part the payments have bought. Net equity is that plus the house’s gain and the cash you have taken out — before the costs of selling. Annualized return is the spreadsheet’s own simple measure: the gain over what you have put in, divided by the years, without compounding. Inside the first year it reads wildly negative, because annualizing a single month multiplies it by twelve while your closing costs are still unrecovered — the spreadsheet does the same thing. Read it from year one on.
Two things to know when you compare it with your sheet. Accumulated net CF here includes the years the property needed feeding; the year-by-year table counts those years as money going in instead, which is why its figure can read higher on a deal with negative years. And a month inside a year carries a twelfth of that year’s after-tax cash flow — the engine works a year at a time, because vacancy, depreciation and the passive-loss rules are annual. The loan columns are the loan alone: mortgage insurance, property tax and insurance are not in them.
Rules of thumb, not laws. A deal can fail several and still suit you.
Every dollar the property needs is put into the alternatives on the same day.
All five lines are shown after tax. Savings and bonds are taxed each year as interest is earned; shares, gold and the property are taxed once at the end.
Your own inputs sit somewhere in each grid.