If you own rental property, you already know how valuable depreciation can be for lowering your taxable income each year. But what happens if your total income climbs higher than you expected from something like a big raise at work, a successful business, or multiple investment streams?
Does your income ever become too high to benefit from rental property depreciation? Are there IRS rules or thresholds that could limit your ability to claim this tax-saving deduction?
Here’s how income limits interact with rental property depreciation, what the IRS actually says about high earners, and what steps you can take if you find yourself hitting those limits.
Is there an income limit for claiming rental property depreciation?
Depreciation itself has no income limit. The IRS allows you to calculate and claim depreciation on your rental property every year, regardless of your income level. Even if your income exceeds the passive loss threshold, you can still calculate depreciation each year.
The catch? It might not immediately reduce your taxable income if your losses are considered “passive.” Your ability to actually use those depreciation deductions depends on your overall income, due to the passive loss rules.
How higher income affects your ability to use depreciation
Your ability to use rental losses, including those created by depreciation, to offset your other income can become limited once your adjusted gross income (AGI) crosses certain thresholds.
For most individual landlords, if your AGI is $100,000 or less, you can generally deduct up to $25,000 of passive rental losses (which includes depreciation) against your non-rental income. But as your income rises above $100,000, this allowance gradually phases out.
Once your AGI hits $150,000, you can no longer use current-year passive losses to offset other non-passive income. Instead, these losses are suspended and carried forward to future tax years. You can read more about these rules and thresholds in the IRS guidance on Topic No. 704, Depreciation.
Depreciation vs. passive loss limits
Understanding the difference between depreciation deductions and passive activity loss rules is key. Depreciation is simply a method to recover the cost of your rental property over time. The passive loss rules decide whether you can use those losses (including depreciation) to offset other non-passive income, like your salary or business profits.
What to know about the $25,000 passive loss allowance
This special provision allows many individual rental property owners to deduct up to $25,000 of passive losses, such as those created by depreciation, against their non-passive income each year.
This benefit requires you to “actively participate” in managing your rental property. This typically means you make management decisions or approve new tenants, even if you use a property manager.
However, the $25,000 allowance phases out based on your income. It begins reducing once your modified adjusted gross income (MAGI) exceeds $100,000.
For every $2 your MAGI exceeds $100,000, the allowance is reduced by $1. By the time your MAGI reaches $150,000, the $25,000 passive loss allowance disappears completely for that year.
Examples for different income scenarios
MAGI under $100,000
If your modified adjusted gross income is $90,000 and you actively participate in your rental property, you can deduct up to $25,000 of passive losses (including depreciation) against your other income.
MAGI between $100,000 and $150,000
Suppose your MAGI is $120,000. The $25,000 allowance is reduced by $10,000 ([$120,000 – $100,000] ÷ 2), so you can only deduct up to $15,000 of passive losses for the year.
MAGI over $150,000
If your MAGI is $155,000, you are not eligible to claim the $25,000 passive loss allowance. Any passive losses, including those from depreciation, are suspended and carried forward to future years when you have passive income or sell the property.
What to do if your income is above the limit
When your income exceeds the threshold for claiming current-year passive losses, you don’t lose those deductions forever. The IRS lets you carry forward unused losses to future years.
Carrying forward unused depreciation deductions
Let’s say you have $30,000 in passive losses from your rental property in one year, but due to your high total income (AGI), you’re only allowed to deduct $10,000. The remaining $20,000 in passive losses will be carried forward to the next year.
If your income drops or you have more passive income in the future, you can use those “suspended” losses to reduce your tax bill.
How suspended losses work
Suspended losses are simply passive losses that you weren’t able to use in the current year due to income limits or other circumstances. These losses don’t expire – they continue to carry forward each year until you either have enough passive income to use them or you sell the rental property.
When you sell the property, any remaining suspended losses can usually be deducted in full, which can provide a significant tax benefit in the year of sale (IRS Topic No. 425).
Even if your income stays above the limit, you’ll eventually benefit from the deductions you’ve accumulated over time.
Maximize Your Rental Property Tax Benefits
Proper record-keeping is essential for maximizing your tax benefits. The IRS requires documentation to support your deductions during audits, including receipts, invoices, and bank statements.
Most landlords report rental income and deductions on Schedule E of Form 1040. This form includes specific lines for each category of deductible expense.
Tax season becomes much easier with organized financial records. Stessa’s free property management platform helps landlords track income and expenses automatically, with features designed for categorizing transactions according to IRS guidelines.
By connecting your bank accounts, mortgage, and property-related expenses, you can generate tax-ready financial reports designed for Schedule E – catching deductions that might otherwise be missed through manual tracking.
Key Stessa features include:
- Automated income and expense tracking: Organize and categorize transactions automatically from connected bank, lender, credit card, and property management accounts at no extra cost.
- Financial reporting: Generate income statements, net cash flow reports, balance sheets (with the paid Stessa Pro plan), and more, all within the platform.
- Tax center: Simplify tax time with the Stessa Tax Package feature. It organizes your transactions and sends you personalized tax reports via email with digital copies of all receipts packaged into a single ZIP file.
- Smart receipt scanning: Add expense receipts to your transactions quickly and accurately via mobile scans and email forwarding, preventing lost or misplaced receipts.
Sign up for a free Stessa account today to simplify tax management for your rental properties.