No necessarily. If your rental property is generating taxable income, then additional depreciation expense will reduce, or possibly eliminate your taxable rental income, which will reduce your tax. Rental losses are passive losses however. If you have a loss from your rental property, you can only use that loss to offset passive income, unless you qualify for the exception to that rule.
There are two exceptions to the passive loss ("PAL") rules:
- If you (or your spouse) are a real estate professional, or
- Your Modified Adjusted Gross income (MAGI) is below the limit that allows you to deduct up to $25,000 annually of rental loss.
If your modified adjusted gross income is $100,000 or less, you may deduct up to $25,000 of rental real estate losses per year if you actively participate in the rental activity. Active participation means you are involved in meaningful management decisions for the rental property and your ownership interest in the property is more than 10%. The allowance is phased out for taxpayers when their MAGI exceeds $100,000 and eliminated entirely when if it exceeds $150,000.
Any losses you can't deduct are carried forward until you have passive income to offset, or you sell the property, at which time you can take all prior losses to offset any gain on the sale.
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