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Exploring the Passive Loss Tax Exemption for ‘Real Estate Professionals’ In the OBBBA
On July 4, 2025, President Trump signed P.L. 119-21 into law, commonly known as the One Big Beautiful Bill Act (OBBBA). Most significantly, the OBBBA made permanent many taxpayer-favorable aspects of the 2017 law known as the Tax Cuts and Jobs Act, including the reduction in individual tax rates and a substantial increase in the lifetime gift and estate tax exclusion amount. However, one often-overlooked provision that was made permanent by the OBBBA could have a significant negative impact on certain taxpayers, particularly those in the rental real estate industry.
As a result of generous depreciation rules, the ownership of rental real estate often generates taxable losses each year. A variety of limitations exist to prevent taxpayers from using those losses against other income, but with exceptions that apply in certain circumstances. For example, taxpayers are generally prohibited from claiming deductions from an activity to the extent they are not “at risk” with respect to the activity. This generally limits losses attributable to nonrecourse debt, but an exception exists for certain qualified nonrecourse financing, which largely exempts real estate from these rules.
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