Once upon a time, individuals could invest in rental real estate and use the big tax losses to offset income earned from other sources. Unfortunately, Congress has squashed that strategy. Now losses from rental real estate are suspended and can be used to offset only rental income. It’s not impossible to use the losses from your rental property to offset other sources of income, but there are several hoops to jump through in order to use the losses.
Unless you meet certain requirements, your rental property business is considered a ‘passive activity’ by the IRS. This means you can deduct expenses only to the extent that you have income from the passive activity. For example, let’s say you receive rental income of $20,000 for the year, but your expenses, including depreciation total $30,000. If your rental property is a passive activity, you can only deduct rental expenses to the extent of your rental income, or $20,000. The remaining $10,000 of rental expenses is suspended until you generate more passive income in future years.