Mar 4, 2026

Most landlords don't understand depreciation and passive losses

Passive Losses From Rental Properties

If you make over $150k in W2 income, either by yourself or combined with your spouse, and you also own an investment property that you rent, you need to understand passive loss rules.

But before that, let’s talk about depreciation. Most rental properties get an annual deduction equal to the purchase price divided by 27.5. On an $800,000 property, that’s a write-off of about $29,000 per year. Really it’s just tax deferral though.

Let’s jump right in with 2 examples:

Let’s say you have rental income of $35,000 and expenses of $30,000, netting to $5,000. After depreciation of $29,000 your tax return will show a loss of 24,000. If you make over $150k at a job, that $24,000 loss gets suspended until you either show a net profit after depreciation, or, when sell the property. In this case, the $29k depreciation write-off only only reduced your current income by $5k.
Now let’s assume the same $35k of income but only $10k of expenses, so $25k profit. After $29k of depreciation, you’ll show a loss of $4k. In this case, the depreciation offset $25k of income that year.

Here’s what surprises some landlords: depreciation is given back as income when you sell- known as depreciation recapture. This is similar to 401k contributions- it might help this year, but you’ll pay it back in the future.

Two things happen when you sell: depreciation recapture (bad) and the release of suspended losses (good). Hopefully the latter is more than the former. Plus of course any capital gains on the property itself.

Bottom line: the depreciation write-off works best when you have a healthy amount of cash flow from the rental property, but even then, it’s just deferring the taxes until later. And if depreciation causes a loss on your tax return, that loss is suspended until you sell or have a net gain.

To learn more about how rental real estate will affect your taxes, schedule a complimentary call.