Do rental properties offer good tax sheltering?

By Jason Watson ()

Perhaps. There are two issues- passive loss limitations and future income tax rates, and we’ve divided this general question into three questions and three answers-

Part 1 - Do rental properties offer good tax sheltering?

Part 2 - How do passive loss limitations affect me?

Part 3 - Is depreciating my rental a good thing?

But first, some backdrop-

To be a tax shelter the investment has to lose money. When it comes to rentals, it is easy to lose money especially if the rental income does not cover the mortgage, you have several repair bills, among other things. These are cash losses; in other words, you are having to put money into the investment to keep it floating.

Another way for your investment to lose money is through non-cash expenses, such as depreciation and mileage. Rental depreciation first- an asset has a useful life, and while there are exceptions (Section 179, Bonus Depreciation) with computers, machinery, etc., the IRS requires an amortization schedule where only a portion of the asset’s cost is deducted each year. Generally speaking, a rental property is depreciated over 27.5 years, and only that portion attributed to the dwelling itself and not the land is depreciated. Separating the land from the overall asset value can be challenging, especially on townhomes and condos.

So, you could have a rental that breaks even from a cash perspective, yet offers a tax loss (and therefore a tax shelter) because of the depreciation. Calculating and deducting depreciation is not automatic- a taxpayer can choose to not depreciate their investment rental (more on that later), but it is generally a bad idea.

Mileage associated with your rental is another non-cash deduction since most vehicles operate for less than the standard mileage rate, but this is typically a small amount relative to everything else. Please read How do passive loss limitations affect me? (part 2 of 3) regarding limitations on your rental losses and subsequent tax sheltering.

Article ID: 54
Last updated: 18 Feb, 2019
Revision: 6
Rentals FAQs - Watson CPA Group -> Do rental properties offer good tax sheltering?