Rental income is considered “passive”—but what happens when you lose money on a rental? Enter: the Passive Activity Loss (PAL) rules.
Under IRS rules, losses from passive activities (like rentals) generally can’t offset non-passive income (like W-2 wages)—unless you meet certain exceptions.
Active Participation Test
You make management decisions, approve tenants, and set rental terms
If so, you may deduct up to $25,000 of rental losses against regular income
Phases out if your modified AGI is over $100,000
Real Estate Professional Exception
You work 750+ hours and over 50% of your working time in real estate activities
If you qualify, losses are not limited by the passive loss rules
These rules are complex.
Improperly claimed losses are an IRS red flag.
Need to know if your rental losses are deductible this year? Contact Us
Rental properties come with tax benefits—if you know what to track. Here's a breakdown of what landlords can typically deduct:
Mortgage interest
Property taxes
Insurance premiums
Repairs and maintenance
HOA fees
Depreciation
Advertising
Legal and accounting fees
Travel to and from the property
You can deduct a portion of the building’s value each year, even if the property appreciates in market value. But you must recapture depreciation if you sell the property—so keep good records.
Capital improvements (like a new roof or HVAC system) must be depreciated over time, not deducted all at once.
Maximize your deductions by using clear records and a CPA who understands real estate. Contact Us
Selling a rental property isn’t just a real estate transaction—it’s a taxable event. Here’s what to know before you close:
Capital Gains Tax: You’ll pay tax on the profit from the sale, based on how long you held the property (long-term vs. short-term rates).
Depreciation Recapture: Any depreciation you claimed over the years must be “recaptured” and taxed—typically at a flat 25%.
State Taxes: Your state may tax gains, even if you live elsewhere.
Ways to Reduce Taxes:
1031 Exchange: Reinvest in a similar property and defer taxes
Timing: Selling in a low-income year may help reduce the tax rate
Track Your Basis: Include improvements, closing costs, and depreciation
Selling? Contact Us to avoid tax surprises at closing.
Own commercial or residential rental property? A cost segregation study could accelerate depreciation and slash your tax bill.
It’s a detailed analysis that breaks down your building’s components (flooring, lighting, HVAC, etc.) into shorter-lived assets—so you can depreciate them faster.
Immediate tax deductions (especially helpful after renovations or new purchases)
Improved cash flow
Works well with bonus depreciation (when applicable)
Property value > $500,000
New construction, major remodels, or recent purchases
You expect consistent profitability or need a large deduction
These studies can generate tens of thousands in tax savings—but only when used strategically. Contact Us and we can help you evaluate if it’s worth it.