Explain passive losses and future rental income

[Howie W.]

Over the years, I was able to buy two properties in different states (Florida and Virginia) that I converted to rentals (the beauty of being in the military and VA loans). Once I retired from the military, my income was over $150,000 (lots of military money is not taxed) and I could no longer deduct the passive losses for the two rental properties. This was 4 years ago. Florida property is positive cash flow each month, but I have over $27,000 in passive losses in the last 4 years. Mortgage will be paid off in 12 years. Virginia property is not positive cash flow and I take a small loss each month and I have over $75,000 is passive losses in the last 4 years. Mortgage will be paid off in 15 years. I have approximately $85,000 in equity in both properties ($170,000 combined) and they both appreciate each year since I purchased them. My questions are: 1. Once the properties are paid off, will the passive losses decrease? 2. Could I use the rental income on the properties (once the they are paid off) to offset the passive losses from previous years? 3. If so for #2, will the rental income be tax free until the passive losses are expended? Any feedback, recommendations, etc are welcome. Thanks.

[Tyler Gibson]

@Howie W. I will start by saying that you should talk to a tax professional about this. I am not a tax professional! That being said these are my thoughts. 

1. Yes your tax deductions will decrease because you will no longer have MTG interest. Other tax deductions would still be available like taxes and operating expenses. (you could get a new MTG on the property to pull out equity and provide a tax deduction from interest payment)

2. I suppose but not sure why you would do that. 

3. NO income is income and taxable unless you have a special case like working overseas for the military.