Rental income is passive income. That means you don't go out and physically "do something" on a recurring bases to actually "earn" it. All you do is "sit there" and collect rental income. That's it. Likewise, rental expenses are passive also. Therefore, your passive rental expenses can only be deducted from the passive rental income. Once the expenses get the taxable income to zero, that's it. You're done. Any excess expenses are automatically carried over to the next year.
It is "EXTREMELY COMMON" for rental property to "ALWAYS" have a loss every single year - especially if there's a mortgage on the property. If you take the common deductions of mortgage interest, property insurance, property taxes, and the depreciation you are required to take by law, those four items alone will exceed the total rental income you receive for the year. Add to that the other rental expeness you're allowed (maintenance, cleaning, repairs, etc.) and you're practically "guaranteed" to operate at a loss *on paper* every single year.
So with each passing year your carry over losses will continue to accumulate, increase and grow. That's fine, it's expected and absolutely normal. You can't realize all those losses until the year you actually sell the property. Only in the year you sell the property can you deduct your accumulated losses from other "ordinary" income. So until then, your passive carry over losses continue to grow and continue to be carried over each and every year.
For a married couple to file separate is the absolute worst way for a married couple to file. When you do that, both of you *AUTOMATICALLY* lose deductions you would otherwise qualify for if you filed joint. So filing separate returns just because you think it will help with rental losses will just end up with both of you paying more in taxes.
