What scenarios lead to a loss- tax benefit

Question

Hello- I have been reading for years about the benefit of being able to deduct $25K in losses from rental properties (and more if you are a real estate professional). The mystery to me- is how do average people get to this loss?  I am including depreciation, taxes, insurance, repairs, and all the typical travel expenses, but still either breaking even or showing a taxable profit.   This may be too individual-based and complex for a forum post, but I am curious what expenses or insights others who have successfully used this tax write-off can share. Thanks!

Joe Splitrock · Answer

My CPA just informed me of a large tax bill on my rentals. It is called making a profit. That is despite claiming all sorts of expenses, mileage, home office, cell phone, repairs, capital improvements, interest and accelerating some depreciation.

Keep in mind that interest rates have been exceptionally low and your two biggest deductions are usually mortgage interest and depreciation. Rents have also been climbing, but if you acquired a property years ago, depreciation is fixed. You can find expenses, like remodeling or painting to help create expenses, but that cuts into profit. You can accelerate depreciation on new purchases, but that only helps temporarily. Once your accelerated loss is realized, you have less depreciation in future years. You are not avoiding taxes, just shifting the burden to earlier years. That can be a big surprise in the future when the tax bill comes due.

Don't feel bad, making a profit is good. The best thing I have found to help generate expenses is keep acquiring properties and keep up on improvements. Then you are growing your portfolio and protecting the quality of your assets. Having more income helps cover taxes too. Taxes will only increase in the future for investors. With the TCJA, we are the lowest point you will probably see in your lifetime and TCJA will expire.

Kate C. · Answer

Thank you, Joe!  I appreciate this down-to-earth and honest reality check. Your takeaway message seems so common sense, but an important reminder- Profit is good. Taxes are high... I am folding in the reminder to be grateful to be in this position.