Updated October 18, 2026. Quick answer: Part II of Form 8582 figures how much of a rental real estate loss you can use under the special allowance for active participation. You carry the loss from Part I onto line 4, enter modified adjusted gross income on line 6, and the smaller of line 4 or line 8 goes on line 9. Line 9 then feeds Part III.
Related reading on this site: IRS Publication 925.
Who uses Part II
The instructions put the purpose this way: “Use Part II to figure the maximum amount of rental loss allowed if you have an overall loss on Part I, line 1d, from your rental real estate activities you actively participated in during 2025.”
The allowance itself is described as “If you actively participated in a passive rental real estate activity, you may be able to deduct up to $25,000 of loss from the activity from your nonpassive income.” The instructions add “Active participation is a less stringent requirement than material participation”. For how a rental can change character when a home is converted, see converting your home to a rental.
One filing status is shut out: “If your filing status is married filing separately and you lived with your spouse at any time during the year, you are not eligible for the special allowances in Part II. Do not complete Part II. Instead, go to Part III of Form 8582.”
Where the number comes from, line by line
The instructions set one rule for the whole part: “Enter all numbers in Part II as positive amounts (that is, greater than zero).”
Line 4. “Enter on line 4 the smaller of the loss on Part I, line 1d, or the loss on line 3.” The IRS example reads “Part I, line 1d, has a loss of $3,000 and line 2d has a gain of $100.” and then “The combined loss on line 3 is $2,900.”
Line 5. The form says “Enter $150,000.” For a married person filing separately, “Married persons filing separate returns who lived apart from their spouses at all times during the year must enter $75,000 on line 5 instead of $150,000.”
Line 6. The form asks you to “Enter modified adjusted gross income, but not less than zero.” The instructions start from your adjusted gross income: “To figure modified adjusted gross income, combine all the amounts used to figure adjusted gross income, except don’t take into account:” and then give a list of items to leave out, which you should read in the instructions for line 6. The IRS example is “Your adjusted gross income on line 11 of Form 1040 or Form 1040-SR is $92,000 and you have taxable social security benefits of $5,500 on line 6b.” The result is “Your modified adjusted gross income is $86,500”.
Lines 7 and 8. The form puts the shortcut first: “If line 6 is greater than or equal to line 5, skip lines 7 and 8”. Otherwise, line 7 says “Subtract line 6 from line 5” and line 8 says “Multiply line 7 by 50% (0.50). Do not enter more than $25,000.” For a married person filing separately who lived apart all year, “Don’t enter more than $12,500 on line 8 if you’re married filing a separate return and you and your spouse lived apart at all times during the year.”
Line 9. “Enter the smaller of line 4 or line 8.” The instructions repeat it for the usual case: “If you do not have prior-year unallowed CRD from rental real estate activities, enter the smaller of line 4 or line 8 on line 9.” Their example is “Part II, line 4, has a loss of $42,000 (reported as a positive amount) and line 8 is $25,000.” The answer is “You enter $25,000 on line 9 (the smaller of line 4 or line 8, both treated as positive amounts).” If you do have CRD, the instructions send you to a worksheet by name, the Worksheet for Special Allowance for Prior Unallowed Commercial Revitalization Deductions From Rental Real Estate Activities; use that worksheet in the instructions rather than a figure from this page.
A computed walk through lines 7 to 9
This is a computed illustration, not an IRS example, of how the form’s own arithmetic chains together. Suppose line 4 is an $18,000 loss and line 6 is $120,000. Line 7 is computed as $150,000 minus $120,000 = $30,000. Line 8 is computed as $30,000 x 0.50 = $15,000, which is under the form’s $25,000 cap. Line 9 is the smaller of the $18,000 on line 4 and the $15,000 on line 8, so line 9 is $15,000.
Where it goes next
Line 9 flows into Part III. Line 11 says “Total losses allowed from all passive activities for 2025. Add lines 9 and 10.” Lines 10 and 11 are covered on the lines 10 and 11 page. If line 9 is not zero, the instructions also say “Complete Part VI only if you entered an amount (other than zero) on Part II, line 9, of Form 8582.” If the loss comes from rentals, the Schedule E page shows where rental results are reported.
Edition and line numbers
This page reads the 2025 Form 8582, Passive Activity Loss Limitations and its 2025 instructions, the current files irs.gov served on 2026-10-18. They are the files for the tax year 2025 return, filed in 2026. The form’s own header says “Attach to Form 1040, 1040-SR, or 1041.” Check the tax year printed on the form you are filling in and use the line numbers on that year’s form, because a different year’s form can number or word its lines differently. The whole form is walked through on the Form 8582 page.
Common mistakes
- Completing Part II while married filing separately and living with your spouse. The instructions say “Do not complete Part II.”
- Entering a loss as a negative number. The instructions say “Enter all numbers in Part II as positive amounts (that is, greater than zero).”
- Using $150,000 on line 5 when the separate-return exception applies. The instructions say “Married persons filing separate returns who lived apart from their spouses at all times during the year must enter $75,000 on line 5 instead of $150,000.”
Related: Schedule E, converting your home to a rental, rental income in retirement, LLC for rental property, and Form 8582.
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- Instructions for Form 8582, Passive Activity Loss Limitations (2025): https://www.irs.gov/pub/irs-pdf/i8582.pdf
- Form 8582, Passive Activity Loss Limitations (2025): https://www.irs.gov/pub/irs-pdf/f8582.pdf
Read from the IRS documents linked above on October 18, 2026. General information, not tax advice. Your own facts decide the outcome, and a preparer, the account provider or the IRS is the right place to confirm anything consequential.