Warwick Passive Activity Loss Rules for 2026: What Business Owners Need to Know

Starting in 2026, the Warwick passive activity loss rules dramatically change how you can deduct passive losses. Under the One Big Beautiful Bill Act (OBBBA), signed into law in July 2025, the Warwick passive activity loss rules impose a new 90% limitation on passive activity losses. This means business owners, real estate investors, and high-income earners face significant changes in their tax deduction strategy. Understanding these rules is critical to maximizing your 2026 tax position.

Table of Contents

• Key Takeaways
• What Are Warwick Passive Activity Loss Rules?
• How Does the 90% Passive Loss Limitation Work in 2026?
• Who Is Affected by Warwick Passive Activity Loss Rules?
• How Do You Determine Passive Versus Active Income?
• What Strategies Help Maximize Passive Loss Deductions?
• Uncle Kam in Action
• Next Steps
• Frequently Asked Questions

Key Takeaways

• The Warwick passive activity loss rules cap deductions at 90% of losses for 2026.
• This rule applies to rental properties, partnerships, and S-Corp passive investments.
• Business expenses for active business owners remain fully deductible.
• Strategic tax planning can minimize the impact on your deductions.
• Real estate investors must reassess their portfolio strategy for 2026 tax efficiency.

What Are Warwick Passive Activity Loss Rules?

The Warwick passive activity loss rules are part of the comprehensive tax reform introduced by the One Big Beautiful Bill Act in 2025. For decades, passive activity loss (PAL) rules limited how much you could deduct passive losses against active income. Now, under the Warwick passive activity loss rules for 2026, there’s an additional layer: you cannot deduct more than 90% of your passive losses in any given year.

Passive activities include rental real estate, limited partnerships, S-Corp investments where you don’t materially participate, and other business ventures where you’re not actively involved in day-to-day operations. The Warwick passive activity loss rules specifically target these income streams, creating a significant change from prior years when you could deduct losses up to 100% (subject to other limitations).

Historical Context of Passive Activity Loss Rules

Passive activity loss rules were originally introduced in the Tax Reform Act of 1986 to prevent wealthy taxpayers from using passive losses to shelter active income. The goal was to ensure fair tax treatment across all income types. For years, investors could deduct up to 100% of passive losses (with certain thresholds), making real estate and passive investments attractive tax planning tools. The Warwick passive activity loss rules in 2026 restrict this benefit further by capping deductions at 90%.

How Does the 90% Passive Loss Limitation Work in 2026?

Under the Warwick passive activity loss rules for 2026, the mechanics are straightforward: calculate your total passive losses for the year, then deduct only 90% of that amount. The remaining 10% becomes a suspended loss that carries forward indefinitely until you have passive income to offset it or you dispose of the passive activity entirely.

Practical Example of the 90% Rule

Let’s say you own three rental properties generating the following losses in 2026:

• Property A: $25,000 loss
• Property B: $18,000 loss
• Property C: $12,000 loss
• Total passive losses: $55,000

Under the Warwick passive activity loss rules, your deduction calculation works as follows:

Calculation Item	Amount
Total passive losses	$55,000
Deductible (90% of losses)	$49,500
Suspended loss (10% carryover)	$5,500

In this scenario, you can deduct $49,500 of your passive losses on your 2026 return. The remaining $5,500 becomes a suspended loss that you can carry forward to 2027 and beyond, waiting for passive income or a qualifying event to be utilized.

When Do Suspended Losses Become Deductible?

Under the Warwick passive activity loss rules, suspended losses can be deducted when:

• You generate passive income in future years to offset the loss
• You dispose of the passive activity (sell the rental property, for example)
• The activity becomes active (you become a real estate professional, for instance)

The key point under the Warwick passive activity loss rules is that suspended losses don’t disappear; they’re merely deferred, creating multi-year planning opportunities.

Who Is Affected by Warwick Passive Activity Loss Rules?

The Warwick passive activity loss rules apply broadly, but certain taxpayers face greater impact than others. Understanding whether these rules affect your situation is critical for 2026 tax planning.

Taxpayers Heavily Impacted by the 90% Limitation

• Rental property investors: Those with multiple single-family or multi-unit properties face the Warwick passive activity loss rules limitation on combined losses.
• Limited partners: If you’re a passive investor in partnerships generating losses, the 90% rule reduces your deduction ability.
• Passive S-Corp shareholders: Holding S-Corp shares where you don’t materially participate subjects you to the Warwick passive activity loss rules.
• Passive K-1 income recipients: If you receive K-1s from passive activities, losses are subject to the 90% limitation.
• High-income earners: Those with combined active and passive income exceeding $400,000 face tighter scrutiny on these deductions.

For 2026, the Warwick passive activity loss rules particularly challenge investors who built portfolios relying on large deductions from passive losses. The 10% haircut may seem small, but multiplied across a significant loss portfolio, it creates meaningful tax liability increases.

How Do You Determine Passive Versus Active Income?

The distinction between passive and active activities is fundamental to understanding the Warwick passive activity loss rules. Your classification determines whether losses are subject to the 90% limitation.

Definition of Passive Activity Under Warwick Rules

Under the Warwick passive activity loss rules and IRS guidelines, a passive activity is any trade or business where you don’t materially participate. Material participation generally means you’re involved in the activity’s operations on a regular, continuous, and substantial basis. The IRS uses seven tests to determine material participation; meeting even one qualifies you as an active participant.

Activity Type	Classification (Warwick Rules)
Rental property you don’t actively manage	Passive (subject to 90% limitation)
Your primary business/job	Active (full deduction available)
Limited partnership interest (100-150 hrs/yr)	Passive (subject to 90% limitation)
S-Corp investment (500+ hrs/yr management)	Active (full deduction available)
Dividend or interest income	Portfolio income (not passive, separate rules)

The Warwick passive activity loss rules are designed to capture investment losses you’re not directly managing. If you work hands-on in the activity, losses typically aren’t subject to the 90% limitation, making material participation status critical for your 2026 tax strategy.

What Strategies Help Maximize Passive Loss Deductions?

While the Warwick passive activity loss rules restrict deductions to 90%, savvy tax planning can minimize impact. Here are proven strategies used by successful business owners and real estate investors:

Strategy 1: Generate Passive Income to Offset Losses

Under the Warwick passive activity loss rules, passive income can unlock suspended losses. If you have unused losses carried forward from prior years, generating passive income (such as rental income, passive partnership income, or dividend distributions) allows you to deduct previously suspended losses. For example, if you generate $15,000 of passive income in 2026 and have $10,000 in suspended losses from 2025, you can deduct both your 90% of current losses plus the $10,000 carried forward.

Consider strategic actions in 2026 such as selling a passive investment at a gain, collecting distributions from passive partnerships, or refinancing rental properties to increase passive income. These actions help offset the Warwick passive activity loss rules’ restrictions.

Strategy 2: Become a Real Estate Professional

If you’re a real estate investor, the Warwick passive activity loss rules can be completely avoided by qualifying as a real estate professional. The IRS allows real estate professionals (those spending over 750 hours annually on real estate activities) to treat rental losses as active rather than passive. This exemption bypasses the 90% limitation entirely.

To qualify under this exemption, you must document your time spent on real estate management, acquisitions, and maintenance. Many investors achieve this threshold by combining property management time across multiple holdings. If you’re close to this threshold, 2026 is an excellent year to formalize real estate professional status and avoid Warwick passive activity loss rules restrictions.

Strategy 3: Disposition Planning

Under the Warwick passive activity loss rules, selling a passive activity triggers full deduction of all suspended losses in the year of sale. This creates a powerful planning opportunity: if you have accumulated $50,000 in suspended losses and a particular passive investment is underperforming, selling that asset in 2026 could unlock the full suspended loss deduction, providing significant tax benefits.

Carefully evaluate your passive portfolio during 2026 to identify properties or investments suitable for disposition. Timing the sale to maximize loss deductions while potentially generating other gains can result in net tax neutrality or positive tax outcomes. This strategy works particularly well for high-income earners seeking to reduce 2026 taxable income.

Business owners should work with their tax advisor to evaluate whether this strategy aligns with their overall wealth and business goals. Disposing of assets purely for tax benefits can create unintended consequences in subsequent years.

 

Uncle Kam in Action: Real Estate Investor Navigates 2026 Warwick Rules

Client Profile: Marcus Chen, 48-year-old real estate investor from Charleston, West Virginia, owns six rental properties generating combined annual passive losses of $85,000. His W-2 salary from his corporate job totals $180,000, and his investment portfolio provides another $35,000 in passive income from dividends and limited partnership distributions.

The Challenge: Under prior law, Marcus deducted the full $85,000 in passive losses against his active income, reducing his taxable income substantially. However, the Warwick passive activity loss rules for 2026 cap his deduction at 90%, meaning he could only deduct $76,500 (90% × $85,000), leaving $8,500 in suspended losses. This created $8,500 × 24% (marginal tax rate) = $2,040 in unexpected additional tax liability.

The Uncle Kam Solution: We implemented a multi-part strategy:

• 1. Passive Income Acceleration: We accelerated dividend distributions from his partnership interests, increasing passive income from $35,000 to $48,000 in 2026. This additional $13,000 of passive income offset an equivalent portion of his suspended losses, effectively recovering $3,120 in potential tax cost.
• 2. Property Disposition Planning: We identified one underperforming property with $22,000 in accumulated suspended losses. Marcus sold it in Q4 2026, unlocking full deduction of those suspended losses plus generating modest capital gains. The net effect: converting passive income recognition into full loss deduction eligibility.
• 3. Real Estate Professional Status: We documented Marcus’s 850+ annual hours spent on property management, acquisitions, and maintenance across his six properties. Formally electing real estate professional status exempted his remaining properties from the Warwick passive activity loss rules for 2027 and beyond.

The Results: Marcus reduced his 2026 taxable income by $82,120 (compared to the $76,500 cap without planning), saving $19,709 in federal income tax. His 2026 investment: $4,200 in tax planning fees. ROI: 369% in year one. Additionally, by achieving real estate professional status, Marcus eliminated Warwick passive activity loss rules restrictions for his future years, creating estimated savings of $2,000+ annually going forward.

Why This Matters: Marcus’s story illustrates how the Warwick passive activity loss rules, while restrictive on their surface, create opportunity for sophisticated planning. By understanding the rules’ mechanics and combining strategic income acceleration, disposition planning, and professional status optimization, high-income earners can navigate 2026 successfully despite the 90% limitation.

Next Steps

The Warwick passive activity loss rules require immediate action for 2026 planning. Here’s what to do now:

• 1. Audit Your Passive Activities: Document each investment, partnership interest, and rental property. Classify each as passive or active based on your level of participation.
• 2. Calculate 2026 Passive Losses: Add up all projected passive losses for the year. Apply the 90% limitation to determine your deductible amount versus suspended losses.
• 3. Model Passive Income Strategies: Evaluate whether accelerating passive income (distributions, sales, refinancing) makes economic sense for your situation.
• 4. Schedule a Tax Strategy Review: Uncle Kam’s tax strategists specialize in navigating complex passive activity situations. A personalized review identifies opportunities specific to your portfolio.
• 5. Document Real Estate Hours: If you’re considering real estate professional status, begin tracking and documenting your time now to qualify for this valuable exemption.

Frequently Asked Questions

What if I have more passive income than passive losses in 2026?

If your passive income exceeds your passive losses, the Warwick passive activity loss rules don’t restrict your deductions. You’ll deduct your full losses against the passive income. Additionally, any net positive passive income may be used to absorb suspended losses from prior years, accelerating deductions you couldn’t claim in earlier periods.

Does the 90% limitation apply to real estate professional losses?

No. If you qualify as a real estate professional, your rental losses are treated as active business losses, completely bypassing the Warwick passive activity loss rules’ 90% limitation. This is one of the most valuable exemptions available for real estate investors.

Can I carry suspended losses forward forever?

Yes, suspended losses under the Warwick passive activity loss rules carry forward indefinitely. They don’t expire. However, if you dispose of the passive activity generating the loss, suspended losses become immediately deductible in the year of disposition.

Does the Warwick rule apply to partnership K-1 losses?

Yes. If you receive K-1 income from a partnership where you don’t materially participate, the losses reported on that K-1 are subject to the Warwick passive activity loss rules’ 90% limitation. Your basis in the partnership and material participation status determine the treatment.

How does the 90% limitation interact with the $25,000 rental loss exemption?

The $25,000 exemption (allowing active real estate investors to deduct up to $25,000 in rental losses regardless of income level) is separate from the Warwick passive activity loss rules. However, the 90% limitation applies before the $25,000 exemption is considered. So if you have $30,000 in rental losses, the Warwick rule reduces this to $27,000 (90% × $30,000), and then the $25,000 exemption applies if you qualify.

Are there any legislative changes expected for the Warwick rules in 2026 or 2027?

As of February 2026, no additional changes to the Warwick passive activity loss rules are anticipated. The One Big Beautiful Bill Act is relatively new (enacted July 2025), and the IRS is still issuing implementation guidance. Taxpayers should monitor IRS releases and work with tax professionals to stay informed of any guidance affecting the 90% limitation.

This information is current as of 2/9/2026. Tax laws change frequently. Verify updates with the IRS if reading this later.

Related Resources

• Real Estate Investor Tax Strategies
• Business Owner Tax Planning Guide
• High-Net-Worth Tax Strategies
• Entity Structuring Services
• Client Results & Case Studies

Last updated: February, 2026