Real Estate Tax CalcWhat is a net operating loss?
A net operating loss (NOL) occurs when your allowable deductions exceed your gross income for the year. For individual taxpayers, the relevant deductions are business and rental deductions — not capital losses or personal deductions. If a real estate investor's rental expenses (including depreciation) exceed all sources of income in a year — wages, business income, rental income, and investment income — the excess is an NOL.
NOLs are not unusual for real estate investors who: (a) hold significant rental portfolios generating large depreciation deductions, (b) qualify for real estate professional status (converting rental losses to non-passive deductions against all income), (c) took a large bonus depreciation deduction from a cost segregation study in an acquisition year, or (d) suffered a material casualty loss. For a high-income investor who acquires multiple properties in one year with aggressive cost segregation, generating a net operating loss is a deliberate tax strategy, not an accident.
How the TCJA and OBBBA changed NOL rules
Prior to the Tax Cuts and Jobs Act (TCJA), NOLs could be carried back two years and forward 20 years, and they could offset up to 100% of taxable income. The TCJA changed these rules significantly for NOLs arising after 2017: the two-year carryback was eliminated (with exceptions for farming losses), the carryforward period became indefinite, and the deduction was limited to 80% of taxable income in any carryforward year.
The One Big Beautiful Bill Act (OBBBA) of 2025 did not significantly change the post-TCJA NOL framework for most real estate investors. The 80% limitation and indefinite carryforward remain in effect. Some business-specific provisions were modified, but the general NOL carryforward rules for individual taxpayers with rental losses remain as established by the TCJA. One important carryback exception: NOLs arising from federally declared disasters can still be carried back to offset prior-year income.
How NOLs interact with the passive activity rules
Here is the key wrinkle for real estate investors: NOLs are a concept that applies to non-passive income and deductions. A passive investor in a rental property whose losses are trapped as passive carryforwards does not generate an NOL from those passive losses — they are already limited to offsetting only passive income, and they do not flow to the NOL calculation.
An NOL from real estate can only arise when the rental losses are treated as non-passive — which requires either real estate professional status (REPS) or a rental activity treated as non-passive for another reason (such as a short-term rental where the owner materially participates). When a REPS investor's rental deductions exceed all income in a year, the resulting shortfall is a genuine NOL that can be carried forward to offset future taxable income.
For the vast majority of passive landlords, what looks like an NOL is actually a suspended passive loss — fundamentally different in treatment and released only when the property is sold. Understanding this distinction prevents overconfident planning assumptions.
Calculating an NOL: what counts and what doesn't
To calculate an NOL, start with your taxable income as computed on Form 1040. Then make specific adjustments that are required under Section 172. The most important adjustments: (1) remove the standard deduction or itemized deductions that are not business-related (personal deductions are excluded from NOL), (2) remove capital loss deductions in excess of capital gains, (3) remove the qualified business income (Section 199A) deduction, and (4) remove non-business deductions in excess of non-business income.
What remains after these adjustments reflects only business and rental-related income and deductions. For a REPS investor with large rental losses, the adjusted figure may be deeply negative — that negative amount is the NOL eligible for carryforward.
Form 1045 (Application for Tentative Refund) and the NOL deduction schedule in the Form 1040 instructions are used to calculate and carry the NOL. Tax software generally automates this calculation, but understanding the inputs ensures you don't leave the deduction on the table.
Carrying NOLs forward: the 80% limitation
Under post-TCJA rules, an NOL carryforward can offset no more than 80% of taxable income in any carryforward year. If you have a $500,000 NOL carryforward and $300,000 of taxable income in the carryforward year, you can deduct a maximum of $240,000 (80% of $300,000) — leaving $260,000 of carryforward for future years. You never lose the NOL; it just takes longer to fully use it.
The indefinite carryforward period is a significant improvement over the old 20-year limit: there is no cliff where an unused NOL expires worthless. Even an investor who has a large NOL from an aggressive cost-segregation year and relatively low income in subsequent years can carry the NOL forward until it is fully used, regardless of how many years it takes.
Strategic timing of NOL creation
Because an NOL requires non-passive treatment of losses, it is most commonly created in years when a REPS investor acquires new property and takes a large cost segregation or bonus depreciation deduction. For a couple where one spouse qualifies for REPS, acquiring a property in a year when the couple has unusually high income (a large W-2 bonus, a business sale, a property sale that produces gain) and taking aggressive first-year depreciation can dramatically reduce taxes on that high-income year.
A NOL that cannot be fully absorbed in the year of creation is carried forward to reduce future income at the 80% limit each year. The time value of creating the NOL in a high-income year is higher than in a lower-income year: the deduction offsets income at 37% now and will eventually offset income at (hopefully) the same or lower rate in carryforward years.
Real estate casualty losses and NOLs
Major casualty losses — hurricane, flood, fire, earthquake — can also contribute to an NOL. The Tax Cuts and Jobs Act limited personal casualty loss deductions to federally declared disaster areas, but business and investment property casualty losses remain deductible without this geographic limitation.
A rental property that suffers a major uninsured casualty loss generates a Section 1231 loss, which (under the 1231 lookback rules) is treated as ordinary rather than capital loss when there have not been net Section 1231 gains in the prior five years. That ordinary loss, combined with other deductions, can create or deepen an NOL. Investors with significant unrealized casualty losses on rental properties should calculate whether the loss, combined with other deductions, produces a carryforward NOL — and whether to document it for future use before the property is repaired or sold.
The excess business loss limitation comes first
Before an NOL can even be computed, individual taxpayers must clear the excess business loss limitation under IRC Section 461(l). For 2025, this provision disallows aggregate business losses exceeding $313,000 for single filers and $626,000 for married couples filing jointly (thresholds indexed annually for inflation). A REPS investor whose cost-segregation-driven losses exceed these limits cannot deduct the full loss against non-business income such as wages or portfolio income in the current year.
The disallowed excess business loss is not lost — it is converted into an NOL carryforward to the following year, where it becomes subject to the 80% limitation like any other NOL. The One Big Beautiful Bill Act made the Section 461(l) limitation permanent. The practical sequence for a high-income real estate professional is therefore: compute the loss, apply the 461(l) cap to limit the current-year deduction, and carry the disallowed excess forward as an NOL.
A worked NOL example
Consider a married couple filing jointly where one spouse qualifies for REPS. In 2025 they have $400,000 of W-2 income from the other spouse, $50,000 of net rental income before depreciation, and a cost segregation study on a newly acquired property produces $900,000 of first-year depreciation. Their aggregate rental loss is $850,000 ($50,000 of income minus $900,000 of depreciation).
The Section 461(l) limitation caps the deductible business loss at $626,000 for 2025. The $400,000 of wages is fully offset in the current year, and the disallowed excess business loss carries forward as an NOL into 2026. In 2026, that NOL can offset up to 80% of the couple's taxable income, with any remainder carried forward indefinitely. The result is that a single aggressive acquisition year shelters income across multiple tax years rather than wasting deductions that exceed current income.
State treatment of NOLs varies
State NOL rules frequently differ from the federal rules. Some states fully conform to the federal 80% limitation and indefinite carryforward; others impose their own carryforward periods, percentage limits, or annual dollar caps. A number of states that decouple from federal bonus depreciation will also produce a different state NOL than the federal figure, because the state starting point already excludes the accelerated depreciation.
States with no personal income tax (such as Texas, Florida, Washington, and Nevada) present no state NOL issue at all for individuals. Investors operating across multiple states should track a separate NOL computation for each state in which they file, since the federal carryforward balance will rarely match the state balances. Apportionment rules for multi-state businesses add further complexity best handled with a CPA.
Documenting and claiming the NOL
An NOL carryforward is reported on the following year's return as a deduction on Schedule 1 of Form 1040, with a supporting computation. The IRS expects taxpayers to attach a statement showing how the NOL was figured and how much remains to carry forward. Because the carryforward can last many years, maintaining a running NOL schedule — original loss, amount used each year, and remaining balance — is essential; the burden of proving the NOL amount in a later audit rests on the taxpayer.
For NOLs eligible for carryback (chiefly those attributable to federally declared disasters), Form 1045 provides a quick tentative-refund route if filed within one year of the end of the NOL year; otherwise an amended return on Form 1040-X is used. Most individual real estate NOLs, however, are carryforward-only under current law, so the practical task is accurate record-keeping rather than a refund claim.
Frequently asked questions
Can a passive landlord generate a net operating loss?
Generally no. Passive rental losses are limited to offsetting passive income — they do not flow into the NOL calculation. An NOL from real estate requires the rental losses to be non-passive, which means the investor must qualify for real estate professional status (REPS) or the rental must be non-passive for another reason (such as a short-term rental with material participation).
How many years can I carry forward an NOL?
Indefinitely for NOLs arising after 2017 under the TCJA. There is no expiration date. However, the carryforward can only offset 80% of taxable income in any single year — meaning large NOLs may take many years to fully utilize, though they will never expire.
Does an NOL reduce the 3.8% net investment income tax?
Not directly. An NOL reduces ordinary taxable income but does not reduce net investment income for NIIT purposes unless the NOL includes net investment income deductions. The NIIT calculation is separate from the income tax calculation, so an investor with a large NOL may still owe NIIT on rental income that is included in net investment income.
What is the 80% limitation on NOL carryforwards?
NOLs arising after 2017 can offset no more than 80% of taxable income in any carryforward year. If taxable income is $200,000, you can use a maximum of $160,000 of NOL carryforward, leaving the rest for future years.
Can cost segregation and bonus depreciation create an NOL?
Yes, if the investor qualifies for real estate professional status. REPS + cost segregation + bonus depreciation is the combination most likely to generate an NOL for a high-income investor: REPS makes the losses non-passive, cost segregation multiplies the depreciation, and bonus depreciation front-loads it all into year one.
What is the excess business loss limitation?
Under Section 461(l), individual taxpayers cannot deduct aggregate business losses exceeding $313,000 (single) or $626,000 (married filing jointly) for 2025, indexed for inflation. The disallowed excess is not lost — it converts into an NOL carried forward to the next year. The One Big Beautiful Bill Act made this limitation permanent, so it applies before the NOL is even computed.
Do states follow the federal NOL rules?
Not always. Some states conform to the federal 80% limitation and indefinite carryforward; others set their own carryforward periods, percentage caps, or dollar limits. States that decouple from bonus depreciation also produce a different state NOL figure. Track a separate NOL computation for each state in which you file.
How do I claim an NOL carryforward?
Report it as a deduction on Schedule 1 of Form 1040 in the carryforward year, attaching a statement showing how the NOL was figured and the remaining balance. Keep a running schedule of the original loss, amounts used each year, and the remaining carryforward, because you bear the burden of proving the figure if audited.
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.