Tax benefits for owning rental property

[Bruce Weyer]

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? 

[Nicholas Aiola]

@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.