Yes, You CAN Write Off Your Depreciation: Here’s How


Let me be upfront by saying that this is not my typical blog. In this week’s blog, I wanted to get something off my chest once and for all because I am sick and tired of talking to people who have been given wrong information.

Now, if you are someone who already owns a handful of rentals, you (hopefully) already know the correct answer and do not need to read this blog. However, if you are new to real estate (or if you are a seasoned investor who is curious on what I am going to write about), then keep reading…

Related: Investors Beware: 8 Warning Signs You May be Overpaying Your Taxes

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The No Write-Off Myth

Last week I met with and spoke to three different investors who told me that there was no tax benefit to owning real estate. Each of them had spoken with their CPAs (all different CPAs), and they were told point blank that rental real estate was not a good way to invest. So why did they call me? Well, they essentially wanted to confirm with me that they shouldn’t invest in real estate. They wanted to double check that all the strategies that I write about on BiggerPockets were not going to help them in the least bit for one reason or another and that real estate was not a tax-efficient investment for them.

What they were told by each of their CPAs was that essentially investing in real estate does not help them with taxes because:

  • Their income is too high, so they do not get to use any depreciation for their rentals, and
  • Their income is too high, so they cannot write-off any expenses they incur for their rental

Both of these statements are absolutely incorrect, and it really bothers me when people are given bad information. Exactly why their tax advisors provided them with this wrong information is beyond me. My only hope was that this was either an honest mistake on the advisors’ parts or that the investor had misunderstood their advisors’ message.

How You Can Use Depreciation to Offset Rental Income

First off, let me be clear that regardless of your income, you can always use depreciation to offset your rental income. For example, if your income was $1M this year and you owned a rental property that had rental income and depreciation expenses, the depreciation expenses can be used to offset your rental income exactly the same as if your total income was $10,000 for the year. There is never a limitation of how much depreciation you can use to offset rental income.

Let’s talk about expenses. Expenses, in fact, are also a very simple and straight-forward concept, and the rules are exactly the same as it is for depreciation. Basically, you can always use your rental expenses to offset your rental income.

This is true regardless of whether you make $10k or $1M this year. So if you are someone who made $1M this year, your rental expenses such as property taxes, insurance, management fees, repairs, etc. can all be used to offset your rental income without any limitations.

Now, what happens if you have an overall net loss on your rentals? Let’s say you have a cash flow positive rental property that provides you with $5,000 per year. But with the tax strategies on maximizing your write offs, your repairs and depreciation expense, you end up with a net tax loss of $2,000. The question is whether the $2,000 excess loss can be used to offset your other income (i.e.: W-2 income).

Related: Real Estate Depreciation: A Strategy for Saving Money on Taxes?

The Caveat

Here is where the potential limitations come in. The IRS has a rule that if you are not a real estate professional (i.e.: someone who spends more time in real estate than your other job/business), then you can use up to $25k of excess rental losses to offset your other income if your income is under $100k.

On the other hand, if your income is between $100k and $150k, then you can still use your real estate losses to offset your other income. The amount you can use just may be limited.

Once your income is above $150k, then you cannot use the excess losses to offset your other income. Those losses are saved in a bucket for you to use to offset future rental income.

An Example

Let’s take Adam for example. Adam works at a W-2 job and makes $40k per year. With rental income of $20k and expenses of $30k, Adam has a net rental loss of $10k. Since his income is under the IRS threshold, he can use the $10k of excess losses to offset his W-2 income.

Now, if Adam makes $200k instead, then he cannot use the $10k excess loss to offset his W-2 income. What is important to note is that we are not saying Adam cannot write off his depreciation or expense — he certainly can do that. He can use all his depreciation and expenses to reduce the entire $20k of rental income. He is only limited in the fact that he cannot use the excess $10k to offset his W-2.

So in Adam’s example, is real estate a good, tax-efficient investment for him? Well, it certainly looks that way to me. Adam is paying zero taxes on the $20k of rental income he received during the year. Compare that to a CD, if in the unlikely event that Adam made interest income of $20k from that bank CD (ok…yes, I know that it is impossible to make that money in a CD), he would have had to pay taxes on that entire $20k.

The same goes for capital gains. Had Adam sold stocks and made $20k, he would generally have to pay taxes on that $20k gain.


So it is important for us to understand that regardless of your income, owning real estate could be a tax efficient investment as there are no limits to expenses, and depreciation can be used to offset rental income. In fact, if Adam owned 3 properties with some profitable and some not-so-profitable, the expenses and depreciation from one rental can be used to offset the income from another rental — again, regardless of how much income Adam makes.

In addition, there are potential loopholes to allow someone with high income to still be able to use excess rental losses to offset W-2 income. The strategy is being able to qualify as a real estate professional. Keep your eyes out, as I hope to write an upcoming article to discuss the details of what a real estate professional is and also to debunk some common myths surrounding that strategy.

Do you write off your depreciation? What are your questions when it comes to real estate and taxes?

Let your voice be heard in the comments below!

About Author

Amanda Han

Amanda Han of Keystone CPA is a tax strategist who specializes in creating cutting-edge tax saving strategies for real estate investors. As real estate investors herself, Amanda has an in-depth understanding of the various aspects of investing including taxation, self-directed investing, entity structuring, and money-raising.


  1. Great article, Amanda. One sidebar comment: I had a question recently from someone who was concerned about the tax on depreciation recapture that is due when you sell the property. And that reminded me of yet another investor who thought he would be better off not taking any depreciation because then he wouldn’t have to pay tax later on the recapture. As you know, the recapture tax is due on the depreciation that is “allowed or allowable” — so if you don’t take the depreciation, you lose the year-by-year tax benefit but still get to pay the recapture tax as if you had.

  2. Thank you Amanda!! You have done what two other CPAs have failed to do. Clearly explain how the income, expenses, and depreciation is calculated; and how any net loses effects other W-2 income. A really big Thank You!!

  3. I thought it was a great article and clears up confusion for many.

    The recapture yes investors think they can always outsmart the system. The investor shouldn’t worry about the recapture and just keep 1031’ing to offset and when they pass away the stepped up basis for the heirs will wipe all that out.

  4. Amanda,

    I suspect the reason for the advice given is that either the CPA or the client actually meant something different than a “tax efficient investment.” I grew up on a farm and one thing farmers are always trying to do is to arrange their income / expenses / capital purchases to “get out of tax.” They do not want tax efficient investments, they want to pay little to no taxes on their current income.

    For the high income individual they often are going to their CPA and asking how can I get out of this tax or lower my tax bill. Obvious things like increasing 401k contributions or HSA accounts, etc are ways to lower an existing tax bill. If their income is very high however, then real estate cannot lower their current tax bill. It can provide them more income at little to no tax but it cannot lower the tax they already owe on their other income. I suspect that is what the advice was trying to say even though it was stated incorrectly.

    Real estate is a great way to invest for tax benefits. It’s just not a great way to get out of other taxes unless your income is low.

    I tell people there is a great way to get out of taxes, just make less money. They never seem very pleased with that answer.

  5. Hi Amanda,

    I have a question regarding this comment from your post: “Once your income is above $150k, then you cannot use the excess losses to offset your other income. Those losses are saved in a bucket for you to use to offset future rental income.”

    How long can these losses be used to offset future rental income? One year, two years, forever?



      • So every year you need to look back at the prior years unused losses, and use that to offset income in the current tax year? What’s the correct IRS term for this? And where does it show up on the tax form?

        Sorry for all the newbie questions, but April 2015 will be my first year filing as a landlord.


        • Thanks for the great article. I have a similar question to Trevor’s.

          Let’s say you start investing in rental property today and have over $150K in W2 income. Since you start in Sept, your expenses are incurred late in the year before your rent income builds. For example, you have $10K in start up expenses and make $3K in rent income for the year. Do you carry the $7K loss forward into the next tax year, where hopefully your rent income exceeded expenses?

        • Trevor: The tax term is passive loss carryforward and yes these losses accumulate each year and is used to offset rental income from all your other rentals whenever they are generated in the future.

  6. Great article, Amanda.
    It AMAZES me the bad advice clients receive from attorneys/cpa’s ALL the time. The clients never seem to want to change attorneys or accountants though. Although , I have to say, there are TONS of extremely sharp CPAs and attorneys out there (youself included).
    I had a CPA call me today, his client wanted to do a 1031 exchange, they closed on their sale on 8/22 and had advised their attorney that BEFORE closing that they would like to do a 1031 exchange ($1.5 million sale, do debt, fully depreciated) and the attorney said “No problem, we can close today and set the exchange up next week! Exchange is blown and they are gonna owe $400K in taxes!

  7. Amanda, this is an awesome write up. I am glad to have you as my Tax/Wealth Advisor.

    I am one of those high income W2 earners and your firm has reduced my W2 income tax obligations significantly since I am a full time real estate professional.

    I look forward to seeing your article on this topic to help educate people so they stop receiving so much bad advice.

    Gena Lofton

  8. Thank you for this article! Great read and easy to understand examples!

    I had my accountant and CPA all tell me the same thing for years! I did not end up claiming the depreciation for years! Is there any way to reclaim that going forward? I need to find a new CPA. It’s awful because you pay good money for a professional and they end up costing you thousands of dollars in the long run.

    • Oh my…sorry to hear that Lena and yes it is possible to make an adjustment to claim the missed depreciation for the lost years. Just make sure you work with a CPA firm that has extensive knowledge in work with real estate investors.

    • Mike Moreken

      No CPA is to be trusted. You are signing too, guess who gets contacted for and audit.

      Years ago I did my own taxes for decades, early in this time period 20 years ago I tried over 2 tax years to do taxes using software. I found I was always over riding the software.

      Then a true story from late 1970’s. Some entity created a mythical family of four. Then gave the numbers to 20 different CPAs. They got 20 different answers. So knowing this, plus the idea some software programmer can get it 100%, I figured out the odds are against you. So went back to doing taxes myself. YES tax code is INTERPRETED.

      Bingo I get into business. OK so Sch C is new for me. I used this CPA even though every year (for 4-5 years) I caught his firm missing thousands in write-offs. I also got audited twice via mail by IRS, which was fairly easy to settle with added business costs. So fed up with more than 12 errors every year, thousands missing, incomplete tax forms. I did my own taxes in 2013.

      Oh boy now have a rental property, so Sch E, plus Obama care. OK go to another RE expert CPA. Before I even hand him the tax papers I realize crap can’t use Sch E yet as in 2014 property was not ready to rent. I was committed. So went forward. Same CPA performance, missed thousands, forms, etc.

      So I am like what? Either I am not communicating efficiently, or the CPA firm lacks something (including forgetting all the notes I watched him write down).

      This CPA ^%#% has me filing my first extension, after he went dark 10 days in April. Now has promised me done before Apr 30 so I can get state credits with that due date!

      I tried two free IRA software in 2013 and found after entering all my data the forms would not handle what I had to do. After talking with the both providers found this to be the case. So did paper taxes that year.

      So for next year I am ready to write off CPAs and software as long as I can. Then asking to get burned again I figure I can hand this $280/hour CPA only the Sch E next year? I would do the rest of taxes. 1) he screws up Sch E 2) I get the liability.

      The more I ponder this I think FORGET CPAs + software! Like my sister said, “I am doing my taxes on paper as long as possible”.

  9. Lena, I’m not a CPA but you should see if you can file amended tax returns for prior years to fix the depreciation issue you mentioned. I would look for a CPA that is familiar with real estate. In my experience, there are tax preparers and there are tax savers. Both may have CPA’s but only one is worth the fee.

  10. Great article Amanda!!

    I’m curious if excess losses from a rental can be used to offset gains made from a flip of different property? I have a W2 job (below $150, but not by much), buy fixers and flip them within 6 months. I have purchased a duplex that I renovated and plan to keep. I am curious which, if any, of my expenses on the rental can be used to offset gains made from flipping?

    • Hi Will:

      Unfortunately no…if you are actively flipping then that is in the same bucket as your W-2 income and thus separate from the passive losses of your rental real estate. The simplest thing is looking at passive income using passive losses and active income offset by active losses. For example if you were active on the flipping side and that resulted in a loss, then the loss from the flip can offset w-2 income.

  11. Amanda

    Great article and awesome insight!

    Question regarding the full time real estate classification…..I earn very close to the 150k limit from my W2 position, however I own and manage 7 SFR properties and also have my real estate license. I’m actively working on continuing to grow my portfolio each and every day. Would this classify myself as full time? I’d love to reduce my taxes from the W2 gig.

    Your feed back is really appreciated!


    • Hi Brian:

      For you it comes down to time involved in RE vs at your w-2 job as you must be spending more time in real estate than your Job to be a real estate professional and use the rental losses to offset W-2 income (assuming the income total is $150k to keep things simple). So if you worked 2000 hours at job, then you need 2,001 hours total of time actively involved in the various real estate activities…once you meet this criteria then you can use rental losses to offset w-2 income without limitations.

      • Amanda

        Thanks for the response! One additional question….how does the IRS specify you should document this time spent for RE investing? I do work approximately 2,000 hours each year at the W2 gig….would I fall into the extremely unusual category if I exceeded the W2 hours with RE?

        Your feed back is appreciated!


        • if you spent more than 2,000 hours in RE then you would qualify as real estate professional. The key to document is a consistent method (ie calendar, log, etc.) and outside documentation is important (ie emails, tickets, etc. anything besides your word that says you did something)

  12. Hi Amanda,

    Thank you for your article. Could you explain one thing further. You had said if someone had a W2 income between 100k and 150k, you can use real estate losses to offset other income. Is that the case even if you are not considered a real estate professional?

    You also mentioned in Adam’s example that since his income was below 40k, he fell below the IRS threshold and could use his 10k loss to offset the 40k income. What is the threshold?

    • Hi Scott: Correct…If your income is between $100-$150k you can use some of the losses from rentals to offset w-2 income even if you are not a REP. Once you are a REP there are no limits to income or how much losses can be used.

      With respect to the threshold it is $100k at the lower level. So if you make $100k or less then you can use up to $25k of rental losses to offset W-2 income.

  13. @Amanda Han

    Great post! Newb question here. My understanding is that I can’t report my rental income until the second year. Does that mean I can’t expense depreciation until the second year as well?


    • Hi Taylor: I have not ever heard of not reporting rental income until the second year. Generally you are to report income in the year you earn it. Also for depreciation, the deduction is calculated based on the date it is placed in service (ie tenant moves in in May depreciation starts in May). You may want to double check with your CPA to make sure there is not some mis-communication.

      • Am I correct that you do not prorate depreciation? As in you get the same amount for the year if you put it in service on 1/1 or on 12/31?
        Also if I remember correctly you get half a year in the first year and in the last year (if you hold it the full 27.5 years for residential) or something along those lines?

        Finally it is when it is put into service not when it is actually tenanted that matters correct?
        For example let’s say you are scheduled to buy a new rental next week. There is only light rehab work needed to get it rent ready and after a couple weeks you put it on the market for a 11/1/14 move in. Horrible time of the year to have vacant rentals and in the end you don’t get a tenant until 2/1/15. Since it had been available for a couple of months in 2014 (And you can document this with things like MLS listings, new paper ads, confirmation emails for Craigslist posts, other various online ads etc.) you can take your depreciation for 2014, and can expense items incurred after that date instead of adding them to your capital basis?

        • generally yes there is no proration although sometimes if a large amount of assets are added in at y-e then the midquarter depreciation applies. The answers are yes to both of your two remaining comments.

  14. To Lena and others who have not claimed depreciation in the past:

    Put simply, the IRS has decided to give everyone a free pass in 2014 (ONLY) to fix up their depreciation schedules, whether it be to add previously un-depreciated items, to fix methods or number of years depreciated, or to separate out the different parts of your property-such as the HVAC or the roof-and depreciate these separately from the main building.
    As I hope your accountant has advised you, in 2014 everyone is required to file two Form 3115. One of these goes to Ogden, UT before you file your tax return and one is filed with your tax return. These Form 3115s must be filed for each legal entity that you own (schedule Es, Qsub, Consolidated, etc). This form reports to the IRS a change in your tax method of accounting. Even if you have no changes, you still must file this form. Failure to do so will likely result in an audit on your 2015 taxes as well as unfavorable IRS consquences (a $7,000 fee per non-filed Form 3115 plus an unfavorable IRS provided fixed asset policy). Whew, okay, so file your Form 3115s. Got it? Good.

    If you have never claimed depreciation before, you can claim that you are going from an impermissible to permissible method of accounting under category 7. Because technically it is impermissible to NOT take depreciation, you can now claim a change in depreciation methods using a 481(a) adjustment and use Form 3115 to report this change. If you are doing this, you must not have taken depreciation in the past two years. So for 2014 returns, you cannot have depreciation on your tax return for years 2012 or 2013. Therefore, do NOT amend these returns to claim this depreciation. What you will do is claim the correct, previously unclaimed portion of allowable depreciation for all open AND closed years. Put another way, you can claim all the depreciation that you should have claimed before but did not, as a Section 481(a) adjustment.
    After you have taken this adjustment, report it on your Schedule E under ‘Other Expenses’. The current year depreciation will not be part of this Section 481(a) adjustment; take current year depreciation as you are supposed to on Schedule E, Line 18.

    Disclosure: This is not intended as official advice.

  15. How does the depreciation impact your rental income if you have a company (LLC or S Corp) owning the rental property? I’m assuming that the case you described in your article is when an individual owns the rental property.

    • Shah:

      The LLC will show the rental income and deduct the depreciation and other expenses as usual. Once the individual taxpayer gets the K-1 then how much of the K-1 loss they individual gets to use to offset W-2 and other income fall within the same rules.

      • Shah – A LLC or S-Corp is what is a called a “pass-through entity,” which means it reports the taxable income or loss from the property on its own tax return; but then, as Amanda says, will deliver K-1s to the LLC members, passing through the income or loss onto their personal returns.

        Real estate investors typically use the LLC or S-Corp form of ownership, but avoid the C-Corp, which is common among many other type of business enterprises but is not a pass-through. The reason to stay away from the C-Corp with investment property is the likelihood of double taxation. It works like this: Everything goes along fine until you sell the property. Then the C-Corp will have to pay whatever taxes are due upon sale. That leaves the after-tax cash still in the C-Corp. Getting that money out to the individual owners usually means dissolution or some sort of distribution, and the owners then have to pay tax again, personally, on the money coming out of the Corp. Bad enough having to pay it once!

        I’m not an accountant, so Amanda — have I explained this correctly?

  16. Great Article Amanda. One tip that I can add to the conversation is that if you are new investor and do not know the info Research it spend some time learning about those things to know it well from good sources like BP site and other sites. Sometimes its good to know this info also along with your numbers for the property so you can figure out how a deal works into your overall financial situation.

  17. Mark Lau

    Hi Amanda,

    Great article, but I have been pondering if an individual was a high income earner and had the rental property in an LLC, can the depreciation be taken in the LLC as a separate entity regardless of the income limitations (100k-150k) and then be ‘passed thru’ to the individual or would the w2 limitations still apply in this scenario?


  18. Amanda Han

    Hi Mark,

    There are limitations, but depreciation is a “use it or lose it” tax benefit so I definitely recommend taking it even if it may be limited in the current year as you do not lose those benefits and that can be used for future years.

    • Mark Lau

      Thanks Amanda, but my question was more in reference to the rental property being in an LLC and if its treatment for depreciation would be different than having its title under your personal name. I understand that under a corp or LLC, the expenses along with depreciation are netted prior to it being passed to your personal filing, but does this also apply to real estate? For example, let’s say I own a rental property under XYZ LLC and I make $150k. Would I be able to take the full depreciation since the property is under the LLC or would the limitation still exist because I am at $150k agi and I would get no depreciation benefit on my schedule D?


      • Amanda Han

        Hi Mark,

        No…depreciation is treated the same in LLC vs personal assuming the LLC files taxes as a disregarded entity or Partnership. If it files as a C Corporation then it remains in the C Corporation and offsets C Corporation income.

  19. Mark Patel


    I have a question for you related to depreciation recapture. I have a property that I purchased for $100k in 2010 and have taken regular deprecation every yr. In addition I have made major improvements (new roof, foundation etc) that I also depreciated every year from 2012 onwards. When I go and sell the propoerty what happens to the used & unused portion of the deprecation used for the major improvements? I know that the house depreciation gets added back tot he home bases but what happens to the other forms of depreciation that was already used in previous years like roof, computers, etc? Is that also added back to the bases?

    Mark patel

  20. I’ve a question related to depreciation of rental and depreciation recapture. For high income earners that unable to deduct rental losses from regular W2 income, is it better off to have a rental property with large depreciation (thus result large passive carry over losses) or smaller depreciation (thus smaller passive over losses) if I plan to sell the property dew years down the road? Would I be able to include the passive carryover losses to reduce my capital gain ?

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