Landlord Tax Benefit Estimator: Depreciation + Deductions
Example: Property purchase price: 350000 $ · Land value (% of purchase price — not depreciable): 20 % · Annual mortgage interest paid: 20000 $ · Gross annual rental income: 28000 $ · Annual operating expenses (tax, insurance, management, repairs): 9000 $ · Your adjusted gross income (AGI): 95000 $ · Marginal income tax rate: 22 %
| Annual tax savings | $2,460 |
| Annual depreciation deduction | $10,182 |
| Total annual deductions | $39,182 |
| Rental net income (loss) | $-11,182 |
| Allowable passive loss (IRS §469) | $11,182 |
Worked example
A $350,000 property with 20% land value has $280,000 of depreciable improvements. Annual depreciation: $280,000 ÷ 27.5 = $10,182. Add $20,000 mortgage interest + $9,000 operating expenses = $39,182 total deductions. Against $28,000 gross income: net loss of $11,182. AGI of $95,000 is under $100,000, so the full $11,182 loss is allowable. At a 22% tax rate: annual tax savings of $2,460 — essentially a $205/month tax break from owning the rental.
Frequently asked questions
What is the $25,000 passive activity loss allowance?
IRS Section 469 allows active participants in rental real estate (those who materially participate and have AGI under $100,000) to deduct up to $25,000 of rental losses against ordinary income. This allowance phases out by 50 cents for every dollar of AGI above $100,000, reaching zero at $150,000 AGI.
What happens to disallowed passive losses?
Passive losses above the $25,000 allowance are suspended and carry forward to future years. They can be used against future rental income or recognized in full when you sell the property. Real estate professionals (750+ hours/yr in real estate activities) can deduct unlimited rental losses regardless of AGI.
Does depreciation recapture apply when I sell?
Yes. When you sell a rental property, the IRS recaptures accumulated depreciation at a 25% tax rate (Section 1250 unrecaptured gain), separate from the regular capital gains rate. Plan for this in your exit strategy — deferred depreciation is not free, it is deferred.