The IRS Deductions Blog

Question: Rental Property Tax Deduction question?

We upgraded from a townhouse to an SFH last year and rented out the TH. Taxwise, my rental income does not cover the property tax+mortgage interest+depreciation+maintenance so I’m not getting any deduction off this loss.

My question is, let’s say I kept this property for 5 years and sell it then, how will the cost basis be calculated at that time? Will IRS take the depreciated amount off my cost basis even though I get no benefit out of it?

Thanks

Answer: When reporting the sale of or computing gain or loss on rental property, you are required to make an adjustment to your basis for allowable depreciation regardless of whether the deduction was taken.

Passive Activity losses : In general, you can deduct passive activity losses only from passive activity income (a limit on loss deductions). You carry any excess loss forward to the following year or years until used, or until deducted in the year you dispose of your entire interest in the activity in a fully taxable transaction.

Refer to Publication 527, Residential Rental Property and Publication 925, Passive Activity and At-Risk Rules .

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