tax loss on rental property

[Sophia52]

Mainly due to depreciation, I take a significant loss on my rental property each year.  However, only a (small) portion of that loss is allowed to be deducted.  When I sell the property, will the basis be adjusted down due the full depreciation I have taken, even if I have had no real tax advantage from that depreciation due to the limit on losses?  If so, should I just not take any depreciation expense? Or do I have some other options.  I'm new at this.

[JamesG1 · Accepted solution]

It is not uncommon that an IRS Schedule E reporting residential rental income/loss would report a tax loss.  And it is not uncommon that IRS form 8582 Passive Activity Loss Limitations would report prior years unallowed losses.  See Part I line 1c.

In many cases, upon the sale of the rental property, the prior years unallowed losses will be recovered.  See this example.

It is not recommended that you not claim depreciation as a residential rental expense.

The sale of residential rental property is reported on IRS form 4797 Sales of Business Property under Part III as IRS section 1250 property.

The sale of IRS section 1250 property requires the recapture of depreciation (or depletion) allowed or allowable on line 22.  See this example.

So, whether you claim depreciation or not, you must report depreciation allowable upon the sale of the residential rental property.

[Mike9241]

I will point out that you can do a section 1031 exchange on rental properties to avoid paying taxes on the gain. The downside is that those suspended passive losses remain because the disposal though a 1031, is not a complete taxable transaction.