Read about the Passive Activity Loss Exception For Real Estate Professionals. I did a search and found this under http://www.legalmatch.com
"Rental real estate activities will not be treated as passive activities for a taxpayer who is considered a real estate professional. This means that losses from such activities will not be limited to offset passive activity income only, but they can offset other income as well.
Who Is A Real Estate Professional?
A taxpayer is considered a real estate profession if he/she satisfies the following requirements:
More than one-half of the personal services performed in trades or businesses by the taxpayer during a taxable year are performed in real property trades or businesses in which the taxpayer materially participates; and
Such taxpayer performs more than 750 hours of services during the taxable year in real property trades or businesses in which the taxpayer materially participates."
Additionally I found http://www.real-estate-owner.com/passive-activity.html
Passive Loss Limit
If you meet the "real estate professional" exception, there is no
limit to the amount of losses you can deduct. The real estate
losses are deductible against any other form of income.
For more information regarding this important exception, see IRS Publication 925: Passive Activity and At-Risk Rules, and â€œException for Real Estate Professionalsâ€ in IRS Publication 527: Residential Rental Property.