Deducting Rental Losses as a San Antonio Landlord: The $25K Allowance, REPS, and the Short-Term Rental Exception

You bought a duplex in Converse, ran the numbers, and after depreciation and interest the rental shows a $14,000 loss on paper. You expect that loss to knock down the tax on your W-2 income. Then your CPA tells you it can't — it gets suspended and carried forward. That is IRC § 469, the passive activity loss (PAL) rules, and it is the single biggest surprise for new San Antonio landlords.

There are exactly three ways around it: the $25,000 special allowance for active participants, Real Estate Professional Status (REPS), and the short-term rental exception. Which one applies to you depends on your income, your hours, and whether your tenant stays seven days or seven months.

Why rental losses are passive by default

Under § 469, rental real estate is treated as a passive activity per se — regardless of how involved you are. Passive losses can only offset passive income. If you have no other passive income (most W-2 earners don't), the loss is suspended and carries forward indefinitely until you either generate passive income or sell the property in a fully taxable disposition.

This matters more in San Antonio than people realize. Depreciation on a $300,000 building basis is roughly $10,900 a year on the 27.5-year schedule. Add mortgage interest, insurance, the BCAD property tax bill, SAWS, repairs, and management fees, and a cash-flow-positive rental often books a tax loss. If that loss just sits on Form 8582 year after year, you have not actually gotten the tax benefit everyone told you real estate would deliver.

The $25,000 special allowance under § 469(i)

Congress built a middle-class carve-out. If you actively participate in your rental and your modified adjusted gross income (MAGI) is $100,000 or less, you can deduct up to $25,000 of rental losses against ordinary income each year.

What "active participation" actually requires

The bar is low. You need to make management decisions — approving tenants, setting rent, authorizing repairs, approving capital expenditures. You do not have to swing a hammer. You do have to own at least 10% of the property. If you use a San Antonio property manager, you can still qualify as long as the significant decisions route through you.

The phaseout — this is where most San Antonio landlords lose it

The $25,000 allowance phases out $1 for every $2 of MAGI over $100,000, hitting zero at $150,000. A dual-income Stone Oak household with two professional salaries is almost certainly over $150,000, which means the special allowance is gone entirely. The loss suspends and waits. For a couple earning $120,000, half the allowance is still intact — $12,500 of loss can offset W-2 income, and the rest carries forward.

Real Estate Professional Status (REPS)

REPS, under § 469(c)(7), flips rental activity from automatically passive to potentially non-passive. If you qualify, losses deduct in full against any income — W-2, 1099, interest, anything.

The tests are strict and the IRS audits them aggressively:

• More than 750 hours in real property trades or businesses during the year, and
• More than half of your total personal service hours for the year in real property trades or businesses.

A full-time software engineer at USAA logging 2,000 W-2 hours cannot be a real estate professional — you would need 2,001 real estate hours, which is not plausible. REPS realistically works for a non-working spouse, a retired owner, or a licensed Texas agent who runs their book of business and their rental portfolio from the same desk. Filing jointly, only one spouse needs to qualify, but that spouse must hit both tests individually.

After you clear the REPS bar, you still have to materially participate in each rental under Reg § 1.469-5T — typically the 500-hour test per activity. Most multi-property owners file a grouping election under Rev. Proc. 2010-13 to treat all rentals as one activity, so the 500 hours apply across the portfolio instead of per door. That election is written, attached to the return, and effectively permanent — do not toggle it on a whim.

Keep a contemporaneous time log. Not a reconstruction. The Tax Court has thrown out REPS claims from landlords with far more real activity than paperwork, because the record was built after the audit letter arrived.

The short-term rental exception

Here is the one most San Antonio investors near JBSA-Lackland, the Pearl, or Southtown should actually understand. If the average guest stay is 7 days or fewer, the property is not a "rental activity" under § 469 at all — it is treated as a trade or business. That means you do not need REPS. You only need to materially participate (typically 100 hours and more than anyone else, or the 500-hour test).

For a single owner-operated STR in 78204 or near Fort Sam Houston, hitting 100 hours in a year — handling bookings, cleanings coordination, guest communication, supply runs, maintenance — is realistic. Clear that bar and the loss, including the heavy first-year depreciation plus any cost segregation study, deducts against W-2 income without REPS.

Two traps:

• If your average stay creeps to 8 days or more (common when you take a few monthly bookings during slow seasons), you fall back into standard rental rules and the loss re-passivates.
• If you use a full-service STR manager who handles everything, you probably are not materially participating. The IRS looks at who actually did the work.

Also check City of San Antonio STR permitting (Type 1 vs Type 2) and the hotel occupancy tax before you build a tax strategy on top of a listing that is not legally operating.

What most people get wrong

• Assuming any rental loss hits their refund. It doesn't. Default is suspended. Run your MAGI against the $100K–$150K phaseout before you count on the deduction.
• Claiming REPS without the hour log. A spreadsheet built the week before filing will not survive an audit. Log hours as they happen — calendar entries, mileage records from drives to the property in Schertz or Cibolo, timestamps on tenant texts.
• Confusing "active participation" with "material participation." Active participation is the lower bar for the $25K allowance. Material participation is the higher bar for REPS and the STR exception. They are different tests with different consequences.
• Forgetting the grouping election. Owners of four or five single-family rentals try to qualify as REPS without grouping and fail the 500-hour material participation test on each individual door. One election fixes it, but it must be filed.
• Thinking suspended losses vanish. They don't. They carry forward and release in full when you sell that property in a fully taxable sale — a 1031 exchange defers the release along with the gain, which can be a feature or a bug depending on your plan.
• Treating a long-term rental like an STR for tax purposes because it is listed on Airbnb. The average stay is what matters, not the platform. A 30-day minimum Airbnb is a regular rental under § 469.

Working with a San Antonio CPA on this

This is not DIY TurboTax territory once you have more than one door or any STR activity. When you interview a CPA, ask specifically:

• How many real estate professional returns do you file each year, and how many have been audited?
• Do you handle cost segregation studies, and at what property value do they start making sense?
• Will you prepare the § 469(c)(7)(A) grouping election if needed?
• How do you want me to track hours and expenses during the year?

A Texas CPA who does real estate seriously will have opinions on all four. One who hesitates on the grouping election is not the right fit for a growing portfolio.

Bring to the first meeting: closing disclosures for every property, prior-year Form 8582 (which shows suspended losses), depreciation schedules, and a draft hour log if REPS or STR status is on the table. Texas has no state income tax, so this is entirely a federal conversation — but the BCAD appraisal and your January 31 property tax bill drive a huge share of the deductible expense column, so bring those too.

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If you are still shopping for the right property to run these numbers against, RentInSA's active inventory shows 4,711 rentals across Bexar County and the I-35 corridor as of October 2026, with a median asking rent of $1,700/mo and higher medians in Schertz ($1,950), Cibolo ($2,025), and Boerne ($2,900) — useful anchors when you model projected rent against a target loss. Browse rentals at /rentals to study comps, list a rental you own at /list-your-home, or find a Texas agent who works with investors at /agents.