Tax benefits for owning rental property

8 Replies

Just curious as to exactly how owning a rental property can lower my AGI (adjusted gross income)? I have heard that I can take the following:

depreciation, but doesn't this just lower my net income for the property? what happens if I take a paper loss?

Interest expense on loan?

Home office? 

any others I'm not thinking of? 

@Bruce Weyer You would want to talk to an accountant for the exact items that can be deducted but you have hit on the main ones. Essentially any expense related to the property or the maintenance of the property would be deductable. 

@Brian

@Brian M Sweeney yes, I am. my understanding is there are 3 main types of income. Passive, earned, and portfolio. I guess im asking if my passive "loss" can be deducted from my "earned" income? or does the IRS silo it? can passive income losses only be deducted from passive income? or can they be mixed?

@Bruce Weyer In a lot of cases, depreciation is the reason for tax-free cash flow. Gross rents less expenses equals cash flow in your pocket. Depreciation is a noncash deduction that can wipe out most, if not all, of your taxable income.

Rental income is passive in nature. If depreciation causes a loss, you can deduct the loss in certain scenarios:

1. Against other passive income.

2. If your AGI is under $100,000, you can deduct up to $25k of rental losses against nonpassive income. If it's between $100k-150k, the $25k allowable loss limit phases out (once you hit $150k, you will be unable to deduct passive losses against passive income). Keep in mind, you don't "lose" these losses, they're just suspended and carried over to future years.

3. If you're a "real estate professional" (you must meet certain requirements to qualify as a RE pro), your rental losses are not considered passive and can be deducted in full against nonpassive income.

There are great answers in here already. Being a "Real Estate Professional" has great tax benefits if you qualify. If so, you can have even more tax benefits with cost segregation.

Originally posted by @Brian M Sweeney :
@Nicholas Aiola the above comments the Bruce made is accurate. Although you can always save your passive losses for future large passive gains.

This is true, but one should note an important limitation to this was imposed with the TCJA. NOLs (Net operating Losses) can only offset 80 percent of taxable income in the carry-forward years.