Residential Rental Real Estate reported on SCH E will almost always operate at a loss every single year, *on paper* at tax filing time. Especially if you have a mortgage on it. When you add up the deductible expenses of mortgage interest, property taxes, property insurance and add that to the depreciation you are required to take on rental property every year, those four expenses alone are usually enough to exceed the total rental income received in the tax year. Add to that the other allowed rental expenses (repairs, maintenance, etc) and you're practically guaranteed to show a loss *ON PAPER* at tax filing time. So it's just not all that common for residential rental property to actually produce a taxable income. In fact, it's more common for rental property of this type to operate at a loss every year.
Once you're rental expenses get your taxable rental income to zero, that's it. Any excess losses are just carried forward to the next year. (See exception below). So your losses will just continue to grow with each passing year you rent the property out. You can't realize those losses until the tax year you sell the property. In the tax year you sell, all of your carry over losses are used first to offset the taxable gain on the sale of the property, and then to offset the tax on "other" ordinary income.
Exception: If you are "actively involved" in the management of the rental property, then you are allowed to deduct up to $25K of excess losses on rental property against other ordinary income, provided you have that "other" ordinary income that would otherwise be taxable, to deduct it from. The TTX program takes care of this "for you" automatically in the background without bothering you with the details.
