If you own investment real estate, you may report an annual loss, for tax purposes. Non-cash deductions such as depreciation may generate a paper loss, even if you break even or have positive cash flow from rental income. As long as you play some role in managing the property, you may be able to deduct some or all of the reported loss.
* If your adjusted gross income (AGI) is $100,000 or less, you can deduct up to $25,000 of investment real estate losses against your other income.
* If your AGI exceeds $100,000, the maximum loss you can deduct drops $1 for every $2 your AGI is over the limit. Suppose, for example, your AGI this year is $110,000. That puts you $10,000 over the threshold so your maximum loss is cut by $5,000 ($10,000 divided by 2). Thus, you can deduct up to $20,000 worth of losses from your rental property.
* If your AGI tops $150,000, you can deduct no losses.
Any losses that you can’t deduct right away are carried over to future years. Loss carryovers can offset any taxable income from rental properties and eventually reduce the taxable gain from a sale of the property.