Rental property owners may have a loss, for tax purposes. Even if your
cash income exceeds your outlays, non-cash deductions such as
depreciation may provide a tax loss. If so, any cash flow you receive
will be untaxed.
Moreover, the tax loss may be deductible, up to $25,000 per year. In order
to take the full $25,000 deduction, your adjusted gross income (AGI) must
be no more than $100,000 per year. Over $100,000, this deduction is
phased out, $1 for every $2 over the threshold, until it disappears altogether
at $150,000 in AGI.
Suppose, for example, your AGI is $120,000. You’re $20,000 over the
threshold so your maximum loss is cut by $10,000: you can deduct up to
$15,000 worth of losses from your rental property, not $25,000.
What happens to any losses that you can’t deduct right away? They’re
carried over to future years, when they can offset any taxable income from
rental properties. Eventually, when the properties are sold, any unused
losses will reduce the taxable gain from the sale.
