IRS Form 8825: Rental Income, Passive Loss Limits, and Deadlines

IRS Form 8825 is the form partnerships and S corporations use to report rental real estate income and expenses. It gets attached to Form 1065 or Form 1120-S, keeps rental activity separate from the entity’s other operations, and produces a single net number that flows to Schedule K and then out to each partner or shareholder on their Schedule K-1.¹

Who Has to File Form 8825

Two kinds of entities file this form: partnerships that submit Form 1065 and S corporations that submit Form 1120-S. If the entity has any gross rental income or pays any expenses tied to rental real estate, Form 8825 is attached to the main return.² The rental doesn’t need to be the entity’s main business. A consulting firm organized as an S corporation that happens to own a warehouse it rents out still files Form 8825 for that warehouse.

Sole proprietors and single-member LLCs don’t use this form. They report rental income on Schedule E of Form 1040.³ A single-member LLC is a disregarded entity for federal tax purposes, so it’s treated like the individual owner. The dividing line is straightforward: rental property inside a partnership or S corporation goes on Form 8825; property held personally or in a single-member LLC goes on Schedule E.

What Goes in Part I

Part I is where each property’s address, type, income, and expenses are listed. Page 1 handles up to four properties in columns A through D, and page 2 adds room for four more. Entities with more than eight properties attach additional copies of page 2 until every property is listed.⁴

Each property gets a full street address and a numeric code identifying its type. The IRS uses eight codes:⁵

1 for a single-family residence
2 for a multi-family residence
3 for a vacation or short-term rental
4 for commercial
5 for land
6 for royalties
7 for self-rental
8 for other, with a description attached

Line 2 captures gross rents and any other income tied to the rental activity for each property. Lines 3 through 17 break out deductible expenses by category: advertising, cleaning, insurance, mortgage interest, taxes, professional fees, repairs, utilities, wages, and depreciation. Line 18 totals expenses, and Line 19 subtracts them from Line 2 to give net income or loss for each individual property.⁵

Every figure needs supporting documentation: leases, receipts, contractor invoices, insurance statements, mortgage interest statements, and depreciation schedules. If a deduction can’t be substantiated when the IRS asks, the accuracy-related penalty under Section 6662 adds 20% to the underpaid tax.⁶ On a $50,000 understatement, that alone is $10,000.

Repairs Versus Improvements

This is where filers most often stumble. A repair keeps property in its current working condition and is fully deductible in the year paid. An improvement adds value, extends the property’s useful life, or adapts it to a new use, and it has to be capitalized and depreciated.⁷

Fixing a broken pipe is a repair. Replacing the entire plumbing system is an improvement. Patching a section of roof is a repair. Installing a new roof is an improvement. The IRS test looks at whether the work is a betterment, a restoration, or an adaptation to a new use. Anything landing in one of those three buckets gets capitalized.

The de minimis safe harbor election helps here. Entities without audited financial statements can expense items costing $2,500 or less per invoice and skip the repair-versus-improvement analysis entirely. Entities with audited financials get a $5,000 threshold.⁷ The election must be attached to the return each year.

Part II and the Bottom Line

Part II collapses every property into a single figure. Line 20a adds up rental income across all properties, including any additional pages. Line 20b adds up total expenses.⁸ Line 21 picks up any net gain or loss from selling rental property, reported through Form 4797. Line 22a picks up net rental income flowing in from other partnerships or trusts in which this entity holds an interest.

Line 23 combines all of it into the entity’s net rental real estate income or loss for the year. That number goes to Schedule K, Line 2, of the entity’s Form 1065 or Form 1120-S.⁵

How the Income Reaches Owners

The Line 23 total doesn’t stop at the entity. From Schedule K, each person’s share is allocated to a Schedule K-1. Partners get Schedule K-1 (Form 1065); S corporation shareholders get Schedule K-1 (Form 1120-S). Net rental real estate income or loss lands in Box 2 in both cases.⁹

When the entity owns multiple properties that qualify as separate passive activities, the instructions require a statement attached to Schedule K breaking out net income or loss by activity. Each K-1 gets its own statement showing that owner’s share by activity.⁸ The passive activity rules apply at the activity level on the individual’s return, so that breakdown matters.

Passive Activity Rules That Limit the Loss

Rental real estate income on Form 8825 is almost always passive. On the individual owner’s return, losses can only offset other passive income, and unused losses carry forward. This is the surprise for many owners: the entity can report a $40,000 rental loss, but none of it may be deductible this year if the individual owner has no passive income to soak it up.¹⁰

The $25,000 Special Allowance

An individual who “actively participates” in a rental real estate activity can deduct up to $25,000 in rental losses against nonpassive income like wages or business profits. Active participation is a lower bar than material participation. It essentially means making management decisions such as approving tenants, setting rental terms, or authorizing repairs, even when a property manager handles day-to-day operations.

The allowance phases out once modified adjusted gross income passes $100,000. Every dollar above that threshold reduces the allowance by 50 cents, and it disappears completely at $150,000 of modified AGI.¹⁰ The allowance applies to individuals, not to the entity itself; each partner or shareholder claims it, if eligible, when reporting K-1 amounts.

Real Estate Professional Status

A taxpayer who qualifies as a real estate professional can treat rental real estate losses as nonpassive, meaning those losses can offset any type of income without a cap. Two tests have to be met in the same tax year: more than half of the taxpayer’s total working hours must be in real property businesses, and the taxpayer must log more than 750 hours in those real property activities. On a joint return, only one spouse needs to meet both tests.¹⁰

Qualifying isn’t quite enough on its own. The taxpayer still has to materially participate in each rental activity to treat its losses as nonpassive. A real estate professional can elect to group all rental real estate interests into a single activity, which makes the material participation test easier to meet across a diversified portfolio.

Deadlines and Late-Filing Penalties

Because Form 8825 rides along with the entity return, it follows the same calendar. Form 1065 and Form 1120-S are due on the 15th day of the third month after the tax year ends. For calendar-year filers, that’s March 15. If March 15 lands on a weekend or holiday, the deadline moves to the next business day. A six-month extension is available by filing Form 7004 before the original due date.¹¹

Late-filing penalties are steep and stack up per owner. For partnerships, the penalty is assessed per partner for each month or partial month the return is late, up to 12 months.¹² S corporations face the same structure, calculated per shareholder per month.¹³ The base amount is $195, adjusted annually for inflation and now well above that. A four-partner partnership filing three months late owes the penalty twelve times over: four partners times three months. The penalty applies even when no tax is due at the entity level.

Records to Keep

Form 8825 cannot stand alone. It’s filed as part of the entity’s Form 1065 or Form 1120-S, either electronically or by mail. Keep copies of the filed return and all supporting records for at least three years from the filing date, which is the standard statute of limitations for the IRS to assess additional tax.¹⁴ Rental property carries a longer practical timeline because depreciation schedules run for decades. Hold records for as long as the entity owns the property and at least three years after disposing of it; that depreciation history is what determines gain or loss on sale.

1
Internal Revenue Service. About Form 8825, Rental Real Estate Income and Expenses of a Partnership or an S Corporation
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Internal Revenue Service. Instructions for Form 8825 and Schedule A – Purpose of Form
3
Internal Revenue Service. Topic No. 414, Rental Income and Expenses
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Internal Revenue Service. Instructions for Form 8825 – Rental Real Estate Income and Expenses of a Partnership or an S Corporation
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Internal Revenue Service. Form 8825 – Rental Real Estate Income and Expenses of a Partnership or an S Corporation
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Internal Revenue Service. Accuracy-Related Penalty
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Internal Revenue Service. Tangible Property Final Regulations
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Internal Revenue Service. Instructions for Form 8825 and Schedule A
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Internal Revenue Service. 2025 Schedule K-1 (Form 1065)
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Office of the Law Revision Counsel. 26 USC 469 – Passive Activity Losses and Credits Limited
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Internal Revenue Service. Publication 509 (2026), Tax Calendars
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Office of the Law Revision Counsel. 26 USC 6698 – Failure to File Partnership Return
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Office of the Law Revision Counsel. 26 U.S. Code 6699 – Failure to File S Corporation Return
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Internal Revenue Service. Topic No. 305, Recordkeeping