Mainstreet Financial Education · Tax Year 2026
A rental can send you a check every month and a tax loss every April. Here is how that happens, the passive loss rules that decide who gets to use the loss, and the honest question of whether you want to be a landlord in retirement.
A good rental produces two things. The first is cash flow: rent minus the mortgage, taxes, insurance, repairs, and a reserve for the roof. The second is a tax loss that exists only on paper, created by depreciation. The two can happen at the same time, and that is what makes rental property different from a bond or a dividend stock.
Here is a plain example. A $350,000 house (with $70,000 of that being land) rents for $2,400 a month. After expenses and the mortgage interest, it clears about $5,000 a year in cash. Depreciation on the $280,000 building is about $10,200 a year. On the tax return, the property shows a $5,200 loss. You received $5,000 in cash and reported a loss. Whether you can use that loss against your other income is the subject of the next section.
Congress decided in 1986 that rental losses are "passive," which means they can only offset passive income unless you fit one of three exceptions. This is where most people's expectations meet reality.
If you actively participate (you approve tenants and make the big decisions, even with a manager), you can deduct up to $25,000 of rental losses against wages, pension, or other ordinary income. The allowance shrinks by $1 for every $2 of modified adjusted gross income above $100,000 and is gone at $150,000. Those thresholds have not changed since 1986 and are not indexed.
If you spend more than 750 hours a year in real estate businesses, and more than half of all your working hours there, your rentals are no longer passive and the losses are fully usable. This is a high bar and the IRS audits it. A spouse who works in real estate full time can qualify the household.
If the average guest stay is seven days or less, the property is not treated as a rental for these rules. If you materially participate (about 100 hours and more than anyone else is the common test), the losses are non-passive. This is why short-term rentals paired with cost segregation have become a popular first-year tax play. It works, and it also means you are running a hospitality business.
A suspended loss is not lost. It carries forward and offsets future rental income, and when you sell the property in a taxable sale, every suspended loss on it is released at once. That release often shelters a large part of the gain in the year of sale. A 1031 exchange does not release the losses; they stay attached and move with you. At death, suspended losses are generally absorbed by the basis step-up.
Do you want to be a landlord at 78? The tax picture for rental property is attractive, but it rewards people who stay in it and manage it. The costs that do not show up in a spreadsheet are the 2 a.m. call, the tenant who stops paying, the eviction that takes four months in a slow county, and the year the HVAC and the roof both go.
There are ways to hold property without the phone calls: a property manager, a Delaware Statutory Trust through a 1031 exchange, or simply selling and investing the proceeds. Each one changes the tax outcome, and the right time to decide is while you still have the energy to choose, not after the first bad year.
Hold a rental in a limited liability company and carry a good umbrella policy. The LLC separates the property's liabilities from your personal savings, and the umbrella covers what the LLC does not. Check with your lender first: moving a mortgaged property into an LLC can trigger the due-on-sale clause.
A rental is a business. Decide whether you want to run one.
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