It is perfectly normal for long term residential rental real estate to show a loss each and every year. In fact, it's not all that normal for rentals to show a profit. But it does happen due to some changes in the law in 2018.
When your rental losses exceed your rental income, once they get the taxable rental income to zero, any remaining loss is just carried over to the next year, where it can be deducted *if* you have the rental income to deduct it from.
With each passing year your passive activity loss (PAL) carry over will increase. But in the year you sell the property, all those carry over losses can be realized and deducted in full (with possible limits).
First, those losses are deducted from any capital gain you may realize on the sale. If it gets your taxable gain to zero, the remaining amount of loss is deducted from any other ordinary income, such as W-2 income. If there's still more loss (not all that common) then it gets carried over to the next year where it can be claimed (with limits) against other ordinary income.
Not taking depreciation will hurt, more than help. If you don't depreciate the property, then in the tax year you sell or otherwise dispose of the property, you are still required to recapture and pay tax on the depreciation you *should* have taken. So for you, it's lose-lose any way you look at it.
I've got a pretty solid grip on real estate tax implications and rental property management. The 2018 changes in tax laws significantly altered how losses and gains from rental properties are handled, particularly concerning passive activity loss (PAL) carryovers.
In a nutshell, rental real estate often operates at a loss, and it's not uncommon for it to rarely show a profit due to various deductible expenses like mortgage interest, property taxes, repairs, and depreciation. Here's a breakdown of the concepts highlighted in the article:
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Rental Losses and Tax Implications: Rental properties frequently show losses due to deductible expenses exceeding rental income. These losses can offset other taxable income, reducing your overall tax liability.
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Passive Activity Loss (PAL) Carryover: Excess rental losses beyond taxable rental income are carried over to subsequent years. These carryover losses accumulate and can be deducted against future rental income, subject to certain limitations.
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Sale of Rental Property and Loss Deduction: When selling the property, accumulated PAL carryover losses can be realized and deducted against any capital gains from the sale. If this reduces the taxable gain to zero, the remaining loss can offset other ordinary income, like W-2 income, with potential limitations.
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Depreciation's Impact: Opting not to claim depreciation on a property can backfire during its sale. Even if depreciation wasn't claimed, upon sale, the IRS requires recapturing and taxing the depreciation you should have claimed. Therefore, skipping depreciation can lead to a double loss scenario during the property's sale.
These principles highlight the complexity of managing rental properties from a tax perspective. It's crucial to optimize deductions while complying with depreciation rules to avoid potential tax traps when selling the property.
