If you own rental real estate, you may be sitting on passive losses that have been suspended for years. You cannot deduct them against other income while they are suspended, but they are not gone. With the right planning, you can release them and use them to cut your tax bill.
Before getting to the release, it helps to see how these losses pile up. Rental real estate is generally treated as passive, and passive losses can normally only offset passive income, not your wages or your investment income. When a rental runs a tax loss, which is common once depreciation is in the mix, and you have no passive income to absorb it, the loss is not lost. It is suspended and carried forward, attached to that activity, year after year, until you either produce passive income or dispose of the activity. Many owners have quietly built up years of these losses without realizing they are holding a future deduction.
The most common way to free these losses is to sell your entire interest in a rental activity. Once released, the losses can offset other income, which can produce meaningful savings in the year of sale. The catch is that not every sale works. Selling to a family member, or to a corporation you or your family control, generally does not release the losses. Giving the property away can permanently waste the tax benefit.
A sale is not the only path, either. Generating passive income somewhere else, such as from another profitable rental or a passive business interest, can absorb suspended losses over time. Qualifying as a real estate professional and materially participating can turn rentals from passive to non-passive going forward, although that does not automatically free losses already suspended, and the requirements are strict and well tested by the IRS. Because the grouping choices made on your earlier returns affect how all of this plays out, it is worth reviewing how your activities were reported before you count on a particular result.
There is also a 2026 wrinkle to watch: the excess business loss limitation. Even after you free a large block of suspended losses through a sale, the law may cap how much you can actually deduct this year, carrying the rest forward. Because the outcome depends on how your properties are grouped, who the buyer is, and when you sell, this is a plan-ahead item, not a decide-at-closing item.
What this means for you: If you are thinking about selling a rental, or you know you have losses trapped from past years, talk to us before you sign anything. The difference between a good sale and a great one is often in the timing and structure.
