Vacation-home owners and small-scale investors in rental real estate apparently will escape the harshest slashes in federal tax benefits in the tax-reform bill being debated by the Senate.

Clarifying language provided by the Senate Finance Committee last week offered such property owners a sizable loophole -- one of the few concessions thrown in real estate's direction this session. The loophole concerns the controversial "passive loss" reform. Under that provision, all real estate rented at any time during the course of a year is to be treated as "passive" activity under federal tax law, no matter how deeply involved the property's owner may be in its management.

All "passive" investment activities, in turn, receive a tough new tax restriction: Losses they produce no longer can be written off against an individual's regular income from salary or dividends. They can be used only to offset taxable income produced by other "passive" investment activities. If the taxpayer has no income from passive sources, losses will have to be carried over indefinitely until he or she has passive income or sells the investment.

For many real estate owners, this amounts to a tax disaster. They will not be able to shelter their regular income by using the losses -- either "paper" losses such as depreciation or true economic losses -- that they've traditionally enjoyed from real estate investments. The only owners who get an apparent reprieve (provided they're careful) are vacation and small rental-home investors.

The Senate Finance Committee reported last week that, under "specified circumstances," owners of rental real estate will be able to write off up to $25,000 in losses per year against their regular incomes. The specified circumstances are: The owner must have at least a 10 percent interest in the property or unit, typically the case in small rental-home and condominium investments. The owner must "actively participate" in the property, such as through "the making of management decisions or arranging for others to provide services (such as repairs) in a significant and bona fide sense." The types of "management decisions" that the Senate includes in its standard of participation are "approving new tenants, deciding on rental terms, approving capital or repair expenditures and other similar decisions."

This definition is far more generous than earlier committee-staff drafts that circulated on Capitol Hill. It effectively allows the nation's thousands of rental- and vacation-home owners to continue using management firms and other professional help in connection with their properties. Earlier drafts, reported in this column, would have prohibited write-offs for taxpayers who didn't directly manage their real estate themselves. That would have cost large numbers of second-home owners and small-scale rental property investors thousands of dollars a year in lost deductions.

The Senate committee's report cites the following example of its relaxed rental-home relief policy: "A taxpayer who owns and rents out an apartment that formerly was his primary residence, or that he used as a part-time vacation home, may be treated as actively participating even if he hires a rental agent and others provide services such as repairs. So long as the taxpayer participates in the manner described above, a lack of participation in operations does not lead to denial of relief."

The Senate's $25,000 rental real estate loophole does not come without limitations. For starters, you don't fully qualify for it if your adjusted gross income exceeds $100,000 a year. The $25,000 maximum phases out on a "pro-rata" schedule for taxpayers with income between $100,000 and $150,000. At the latter figure, the loophole disappears.

"This wasn't designed to help rich people," explained a committee staff member, "just families with moderate property holdings."

A second limitation -- by far the trickier -- relates to the definition of "active participation." Certain vacation rental condominiums, for instance, involve only minimal participation by their owners. They employ on-site pool managers, computerized accounting services and hotel-like guest-service packages to relieve unit owners of headaches associated with their investments. In their present form, such arrangements would not likely meet the Senate's $25,000 write-off test.

A final bonus was tucked away for second-home owners in the technical language released last week by the Senate committee: The tax-reform report makes clear that, irrespective of "passive loss" considerations, a second home rented out for part of the year still qualifies for unlimited deduction of mortgage interest and property taxes.