How to utilize depreciation losses

Hi guys and gals. First time poster here. I would like to get into real estate investing but I still have so many questions. The most pressing one currently is… how do I utilize depreciation?

Depreciation losses from real estate are great, but how do I use them if I have no passive income? I don’t think it can offset my earned income, so how do I take advantage?


IIRC, as a passive investor you can still write off depreciation against earned income up to certain limits. You will need to either read the IRS regulations or consult a tax advisor to determine exactly how these limits affect you.

Depreciation is just another expense – but it’s a “noncash” expense. Hold this thought.

Real estate losses are deductible up to $25k per year. But if your total income is over $150k, the deduction phases out and goes away completely at $200k of income. But don’t despair, the losses aren’t “lost,” they are “suspended” and you will get to take them when you sell the property (or when your income falls below $200k). There are a few other rules, but this is the general idea.

The sweet spot you are trying to hit is a positive cashflow, but a tax loss. Depreciation is often the difference since it reduces income but doesn’t use up cash.

Its been a while since I’ve gone through the regulations but I believe the income limits are moot if you qualify as a “real estate professional”.:

  1. More than one-half of  the personal services you perform in all trades or businesses for the tax year must be performed in real property trades or businesses in which you materially participate (you must spend more hours on real estate activities than non-real estate activities, to prove that you earn your living in the real estate world), and
  2. You must perform more than 750 hours of services during the tax year in real property trades or businesses in which you materially participate. (This minimum-hour requirement prevents a retiree who spends 400 hours a year managing a rental property from qualifying).

That may be a high bar for the small time landlord but applies to those of us who do meet the requirements.

Unless you are a realtor or otherwise involved in the industry, you want to be careful about claiming as a real estate professional.

to get to your 750 hours, you need 750 hours in a SINGLE ACTIVITY. IRS rules are 1 property = 1 activity.

it is unlikely that you have that much time per year per house.

You can also get to the 750 hours by combining activities, which sounds good on the surface. But beware, once you have combined activities, you cannot change or dismantle the groupings in any subsequent tax year. Once combined - always combined.

Once combined, when you sell a single house at a loss, you can’t deduct the loss - it gets suspended until you COMPLETELY dispose of ALL of the entire combined group. ie: you have to sell ALL of the houses to release any losses. Also, as a RE professional, the income is no longer passive. You can no longer use it to offset passive losses elsewhere (LP interests, etc).

Like most investors, if you dispose of one house, you buy another, which is then added to the combine. Your losses will never get out of jail.

read up on Section 469(c)(7)(A)(ii)
" this section shall be applied as if each interest of the taxpayer in rental real estate were a separate activity.
Notwithstanding clause (ii), a taxpayer may elect to treat all interests in rental real estate as one activity."

I agree with this because one of my colleagues did this to get qualified for the property that he wants to buy.

I am confused in the term “depreciation recapture”, is it also defining the same meaning as " utilizing depreciation losses"?
Would any one can make my confusion clear?

“utilizing depreciation losses” means that depreciation makes the property a loss for tax purposes. But because depreciation is a “non-cash” expenses, the property may still have positive cash flow. positive cash flow but a tax loss is the sweet spot.

depreciation recapture happens when you sell a property that has been subject to depreciation. the amount that was depreciated is treated a little differently.

The beginning stage for deciding when a depreciation recapture will happen is to focus the premise of the benefit. There are three separate sorts of premise: unique, balanced, and recomputed basis.when a citizen buys a duty deductible resource for utilization over a few years, the citizen can deduct a rate of the benefit’s worth from his or her yearly assessable pay over the life of the advantage.

No need to complicate this one.

As you are not a real estate professional the only way to treat depreciation is to write it off against rental income. This way you save tax on the rental income.

If you have depreciation left over then it adds up as an asset that you can apply when you sell the property.