Daperis CPAThe Excess Business Loss That Catches People By Surprise
Cost segregation. Real estate professional status. The short-term rental rule. Every one of these is built around the same idea: create a big deductible loss and use it to offset your other income, often a big salary. What almost nobody tells you upfront is that there's a hard dollar limit sitting on top of all of it. If your loss is big enough, you'll hit it.
If you're running a strategy meant to produce a six-figure loss in one year, you need to know this limit exists before you count on the whole thing landing on this year's return.
The Basic Idea
If you're an individual, or you're getting pass-through losses from an S-corp or partnership, you can only use business losses to offset your other income, salary, interest, dividends, investment gains, up to a certain amount each year. This limit kicks in after the other rules that already govern real estate losses. Think of it as the last checkpoint, not the first.
Anything above the limit doesn't disappear. It carries forward and you can use it in a future year, just not this one.
The Numbers, and Why They Moved the Wrong Way
For 2025, the limit is $313,000 for a single filer and $626,000 for a married couple filing jointly. A recent tax law made this limit permanent, no more expiration date.
That same law also changed how the number adjusts each year, and the result is backwards from what you'd expect: for 2026, the limit actually dropped to $256,000 single and $512,000 joint. Lower, not higher. Most limits in the tax code only go up. This one went down, so watch out for older articles still quoting the higher 2025 numbers.
Where This Actually Comes Up
Most people with a rental property or two will never bump into this. It becomes real when someone creates a genuinely large loss in one year, a cost segregation study plus full bonus depreciation on a newly bought property is the classic example, and stacks that loss against a big salary or investment income. A real estate professional or short-term rental owner with a $400,000 paper loss against a $500,000 household income is exactly who this limit was written for.
What This Means for Planning
If you already know a strategy is going to create a loss well above this limit, that's worth planning around before the year ends, not after. Timing a purchase, or spreading a strategy across more than one year, can sometimes keep more of the benefit in the year you actually want it. This only works as advance planning. Once the year is over, the limit is the limit.
Keep It Simple / Key Takeaway 🍕
A big paper loss from real estate isn't automatically a big deduction this year. There's a ceiling on how much can offset your other income in any single year, and that ceiling just got lower for 2026, not higher. If you're running a strategy built to create a large loss, this needs to be part of the plan from the start, not a surprise when your return gets done.
Cost segregation is the strategy most likely to bump into this cap, here's how the two interact.
Disclaimer: This article is for educational and informational purposes only and is not intended as financial, investment, legal, or tax advice. The author assumes no liability whatsoever in connection with its use. This content is not an exhaustive explanation of any topic, practice or process. You should always seek the advice of a licensed professional before making any accounting, tax, financial, investment or legal decision.