If you own investment property, deductions for management fees, depreciation, and other expenses may produce a taxable loss. This might be the case even if you have positive cash flow from rental income. Thus, you would owe no tax on the rental income you pocket.
A loss from rental property is considered a passive loss. For taxpayers with adjusted gross income (AGI) under $100,000, up to $25,000 worth of passive losses can be deducted each year. As your AGI goes from $100,000 to $150,000, your maximum passive loss goes down to zero.
Suppose your AGI in 2008 is $110,000. You are 20 percent through the phaseout range so you are entitled to deduct only 80 percent of the maximum: you can deduct up to $20,000 worth of passive losses.
Any passive losses you cannot deduct can be carried forward to future years. If you have taxable passive income, that passive loss carryforward can serve as an offset. Any unused passive losses can be deducted when you sell the property.