--- title: Can Rental Depreciation Offset Ordinary Income? description: Real estate investors benefit from the tax shelter that real estate depreciation provides. image: https://www.realized1031.com/hubfs/Images/photo/abstract/taking-notes-houses-IS-1257568363.jpg --- [![Realized 1031 Exchange Marketplace](https://www.realized1031.com/hs-fs/hubfs/Images/Brand/Logo/Realized/Realized-Logo-Black.png?width=240&height=80&name=Realized-Logo-Black.png "Realized 1031 Logo") ](https://www.realized1031.com/) - [Wealth Management Gap](https://www.realized1031.com/the-wealth-management-gap) - [Our Process](https://www.realized1031.com/how-realized-works) - [Financial Advisors](https://www.realized1031.com/advisor) - [Resources](https://www.realized1031.com/resources) - [The Company](https://www.realized1031.com/about-us) - [Articles](https://www.realized1031.com/blog) [Register](https://www.realized1031.com/marketplace) [Log In](https://www.realized1031.com/login) - Better Business Bureau Rating: **A+** - [FINRA BrokerCheck](https://brokercheck.finra.org/firm/summary/22333) - [Call](tel:1-877-797-1031) **(877) 797-1031** # Can Rental Depreciation Offset Ordinary Income? Posted Feb 1, 2023 ![taking-notes-houses-IS-1257568363](https://www.realized1031.com/hs-fs/hubfs/Images/photo/abstract/taking-notes-houses-IS-1257568363.jpg?width=753&height=500&name=taking-notes-houses-IS-1257568363.jpg) Real estate investors benefit from the tax shelter that real estate depreciation provides. Best of all, depreciation is a non-cash flow expense since it doesn’t impact an investor’s bank account. Some investors will have a large depreciation expense during a year, which can create an overall loss for their rental property. When that happens, can the loss be used to offset ordinary income? ### How Does Rental Depreciation Work? The IRS allows real estate investors to take an [annual depreciation expense](https://www.realized1031.com/blog/what-is-a-depreciation-schedule-for-rental-property-and-how-are-they-determined) on their rental properties. How much depends on the type of property. For residential properties, the useful life is determined to be 27.5 years. For commercial properties, it’s 39 years. To figure out the annual depreciation expense for a property, divide its value by the number of years. For example, a $400,000 residential property would take approximately $14,545 (400,000/27.5) per year in depreciation expense. You can also divide the number of years by one to get the annual depreciation rate. Using a residential property again, 1/27.5 = 3.64%. Now multiply $400,000 by 3.64% to get $14,560, which is fairly close to the above result. To see how depreciation affects rental income, we subtract the annual depreciation expense from income (after calculating [net operating income](https://www.realized1031.com/glossary/net-operating-income-noi)). The following are simple examples to demonstrate how depreciation impacts taxable income.    Property 1 Income: $25,000 Depreciation: - $15,000 Taxable income: $10,000   A cost segregation analysis can speed up depreciation so that more is taken in earlier years. This can be more than enough to push the property into a paper loss.   Income: $25,000 Depreciation: - $35,000 Taxable income: $-10,000   A loss from one property can offset income on another property. This pairing can occur because both have a passive income/loss status, which we’ll discuss later.   Property 2 Income: $15,000 Depreciation: -$5,000 = $10,000   Using Property 1’s loss to offset income on Property 2 results in a net $0 of income for both properties. ### Rental Depreciation and Ordinary Income What if Property 2 shows a $5,000 loss for a total loss across both properties of $15,000? In this case, we’ve already used our rental property losses to offset all rental property income. But we still have $15,000 of rental property losses available. Can that be used to offset ordinary income, such as wage income? Imagine a real estate investor making $100,000 from their full-time job. Applying the $15,000 rental property loss to their income would bring it down to $85,000. If only it were that simple. Rental property income and losses are considered passive. Wage income is earned income and falls within the category of ordinary income. The IRS does not allow us to mix passive losses with ordinary income. So, it is not possible to offset ordinary income with rental property losses, whether those losses are due to depreciation or operating expenses. But there may be an alternative route to offset ordinary income with rental property losses. ### Qualifying as a Real Estate Professional Qualifying as a real estate (RE) professional can offset ordinary income. However, achieving this status is not easy. Two criteria must be met to qualify: - Work at least 750 hours per year in real estate-related activities. - Any other job you have cannot exceed your hours worked in real estate. 750 hours per year comes out to around 14.5 hours per week. As you can see, this leaves out any other full-time job. So our investor making $100,000 at his full-time job would not be able to qualify as an RE professional. All is not lost, however. A married investor filing jointly has options. The spouse can qualify as an RE professional. In this case, property losses can be applied to the husband’s wages for an overall reduction of income. What are real estate-related activities? These include driving around looking at properties, managing real estate, and researching properties. It’s important to keep track of all the time spent on these activities. Anyone considering qualifying as an RE professional must keep real-time, meticulous records of their activities. A real estate tax professional can help determine if this is the best route. However, with the RE professional status, investors who want to offset ordinary income using rental property depreciation are simply out of luck. This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. Hypothetical examples shown are for illustrative purposes only. Learn Ways to Help Reduce or Defer Taxes [![Learn Tax-Deferred Strategies](https://www.realized1031.com/hs-fs/hubfs/Images/UI/graphics/composites/IPWM-Tax-ebook-250b.png?width=250&height=295&name=IPWM-Tax-ebook-250b.png "Discover ways to potentially ...") ](https://www.realized1031.com/blog/can-rental-depreciation-offset-ordinary-income#blogform) Download eBook ---   --- ### Learn Tax-Deferred Strategies ![Learn Ways to Help Reduce or Defer Taxes](https://www.realized1031.com/hs-fs/hubfs/Images/UI/graphics/composites/IPWM-Tax-ebook-550a.jpg?width=550&height=600&name=IPWM-Tax-ebook-550a.jpg) Discover ways to potentially grow wealth by managing taxes. By providing your email and phone number, you are opting to receive communications from Realized. If you receive a text message and choose to stop receiving further messages, reply STOP to immediately unsubscribe. Msg & Data rates may apply. To manage receiving emails from Realized visit the Manage Preferences link in any email received. Search ### [Why Realized](https://www.realized1031.com/why-realized) - [Wealth Management](https://www.realized1031.com/the-wealth-management-gap) - [Why Realized](https://www.realized1031.com/why-realized) - [Our Process](https://www.realized1031.com/how-realized-works) - [Scenarios](https://www.realized1031.com/scenarios) - [Private Client Program](https://www.realized1031.com/private-client) - [Realized Exchange Services](https://www.realized1031.com/realized-exchange-services) ### [The Company](https://www.realized1031.com/about-us) - [The Team](https://www.realized1031.com/about-us) - [FAQ](https://www.realized1031.com/frequently-asked-questions) - [Testimonials](https://www.realized1031.com/testimonials) - [Press](https://www.realized1031.com/press) - [Careers](https://www.realized1031.com/careers) ### [Partners](https://www.realized1031.com/partners) - [Financial Advisors](https://www.realized1031.com/advisor) - [Broker Dealers](https://www.realized1031.com/partners/broker-dealers) - [Real Estate Agents](https://www.realized1031.com/partners/real-estate-agents) - [Certified Public Accountants](https://www.realized1031.com/partners/certified-public-accountants) ### [Resources](https://www.realized1031.com/resources) - #### Learn - [Articles](https://www.realized1031.com/blog) - [Glossary of Terms](https://www.realized1031.com/glossary) - [Capital Gains Tax Rates](https://www.realized1031.com/capital-gains-tax-rate) - #### Watch - [Video Library](https://www.realized1031.com/videos) - [Webinar Archive](https://www.realized1031.com/webinars) - #### Read - [Delaware Statutory Trust](https://www.realized1031.com/delaware-statutory-trust) - [Tenants-In-Common](https://www.realized1031.com/tenants-in-common-tic) - [1031 Exchange](https://www.realized1031.com/1031-exchange) - [Qualified Intermediary](https://www.realized1031.com/qualified-intermediary) - [Qualified Opportunity Zones](https://www.realized1031.com/opportunity-zones) #### Realized - 500 W 13th Street Austin, TX 78701 - (877) 797-1031 ##### [Contact Us](https://www.realized1031.com/contact-us) - [![Realized on Facebook](https://www.realized1031.com/hs-fs/hubfs/Images/UI/Social/Icons/Mix/social-facebook-whiterev.png?width=60&height=60&name=social-facebook-whiterev.png)](https://www.facebook.com/Realized/) - [![Realized on LinkedIn](https://www.realized1031.com/hs-fs/hubfs/Images/UI/Social/Icons/Mix/social-linkedin-whiterev.png?width=60&height=60&name=social-linkedin-whiterev.png)](https://www.linkedin.com/company/realized/) - [![Realized on YouTube](https://www.realized1031.com/hs-fs/hubfs/Images/UI/Social/Icons/Mix/social-youtube-whiterev.png?width=60&height=60&name=social-youtube-whiterev.png)](https://www.youtube.com/c/Realized1031?sub_confirmation=1) - [![Realized Holdings, Inc. BBB Business Review](https://www.realized1031.com/hs-fs/hubfs/Images/professional-assoc/bbb/RZH2-bbb-seal.png?width=40&height=65&name=RZH2-bbb-seal.png)](http://www.bbb.org/central-texas/business-reviews/real-estate-investors/realized-holdings-llc-in-austin-tx-1000112948/#bbbonlineclick) - [![FEA Logo](https://www.realized1031.com/hs-fs/hubfs/Images/professional-assoc/fea/RZH2-fea-logo.png?width=82&height=65&name=RZH2-fea-logo.png "FEA Logo")](https://www.1031.org) SECURITIES DISCLOSURE Realized1031.com is a website operated by Realized Technologies, LLC, a wholly owned subsidiary of Realized Holdings, Inc. (“Realized Holdings”). Securities and/or Investment Advisory Services may be offered through Registered Representatives or Investment Advisor Representatives of Realized Financial, Inc. ("Realized"), a broker/dealer, member [FINRA](https://www.finra.org)/[SIPC](https://www.sipc.org/), and registered investment adviser. Realized is a subsidiary of Realized Holdings, Inc. ("Realized Holdings"). Check the background of this firm on [FINRA's BrokerCheck](https://brokercheck.finra.org/firm/summary/22333). Hypothetical example(s) are for illustrative purposes only and are not intended to represent the past or future performance of any specific investment. Investing in alternative assets involves higher risks than traditional investments and is suitable only for sophisticated investors. Alternative investments are often sold by prospectus that discloses all risks, fees, and expenses. They are not tax efficient and an investor should consult with his/her tax advisor prior to investing. Alternative investments have higher fees than traditional investments and they may also be highly leveraged and engage in speculative investment techniques, which can magnify the potential for investment loss or gain and should not be deemed a complete investment program. The value of the investment may fall as well as rise and investors may get back less than they invested. This site is published for residents of the United States who are accredited investors only. Registered Representatives and Investment Advisor Representatives may only conduct business with residents of the states and jurisdictions in which they are properly registered. Therefore, a response to a request for information may be delayed until appropriate registration is obtained or exemption from registration is determined. Not all of services referenced on this site are available in every state and through every representative listed. For additional information, please contact the Realized Compliance department at 512-472-7171 or info@realized1031.com. - [Terms & Conditions](https://www.realized1031.com/terms-and-conditions) - [Privacy Policy](https://www.realized1031.com/privacy-policy) - [Form CRS](https://www.realized1031.com/hubfs/common-files/disclosures/FormCRS.pdf) - [ADV 2A](https://www.realized1031.com/hubfs/common-files/disclosures/ADV2A.pdf) - [Reg BI Disclosures](https://www.realized1031.com/hubfs/common-files/disclosures/RegBI.pdf) -   © 2026 Realized Holdings, Inc. ```json { "@context" : "http://schema.org/", "@type" : "BlogPosting", "articleBody" : "Real estate investors benefit from the tax shelter that real estate depreciation provides. Best of all, depreciation is a non-cash flow expense since it doesn’t impact an investor’s bank account. Some investors will have a large depreciation expense during a year, which can create an overall loss for their rental property. When that happens, can the loss be used to offset ordinary income? How Does Rental Depreciation Work? The IRS allows real estate investors to take an annual depreciation expense on their rental properties. How much depends on the type of property. For residential properties, the useful life is determined to be 27.5 years. For commercial properties, it’s 39 years. To figure out the annual depreciation expense for a property, divide its value by the number of years. For example, a $400,000 residential property would take approximately $14,545 (400,000/27.5) per year in depreciation expense. You can also divide the number of years by one to get the annual depreciation rate. Using a residential property again, 1/27.5 = 3.64%. Now multiply $400,000 by 3.64% to get $14,560, which is fairly close to the above result. To see how depreciation affects rental income, we subtract the annual depreciation expense from income (after calculating net operating income). The following are simple examples to demonstrate how depreciation impacts taxable income. Property 1 Income: $25,000 Depreciation: - $15,000 Taxable income: $10,000 A cost segregation analysis can speed up depreciation so that more is taken in earlier years. This can be more than enough to push the property into a paper loss. Income: $25,000 Depreciation: - $35,000 Taxable income: $-10,000 A loss from one property can offset income on another property. This pairing can occur because both have a passive income/loss status, which we’ll discuss later. Property 2 Income: $15,000 Depreciation: -$5,000 = $10,000 Using Property 1’s loss to offset income on Property 2 results in a net $0 of income for both properties. Rental Depreciation and Ordinary Income What if Property 2 shows a $5,000 loss for a total loss across both properties of $15,000? In this case, we’ve already used our rental property losses to offset all rental property income. But we still have $15,000 of rental property losses available. Can that be used to offset ordinary income, such as wage income? Imagine a real estate investor making $100,000 from their full-time job. Applying the $15,000 rental property loss to their income would bring it down to $85,000. If only it were that simple. Rental property income and losses are considered passive. Wage income is earned income and falls within the category of ordinary income. The IRS does not allow us to mix passive losses with ordinary income. So, it is not possible to offset ordinary income with rental property losses, whether those losses are due to depreciation or operating expenses. But there may be an alternative route to offset ordinary income with rental property losses. Qualifying as a Real Estate Professional Qualifying as a real estate (RE) professional can offset ordinary income. However, achieving this status is not easy. Two criteria must be met to qualify: Work at least 750 hours per year in real estate-related activities. Any other job you have cannot exceed your hours worked in real estate. 750 hours per year comes out to around 14.5 hours per week. As you can see, this leaves out any other full-time job. So our investor making $100,000 at his full-time job would not be able to qualify as an RE professional. All is not lost, however. A married investor filing jointly has options. The spouse can qualify as an RE professional. In this case, property losses can be applied to the husband’s wages for an overall reduction of income. What are real estate-related activities? These include driving around looking at properties, managing real estate, and researching properties. It’s important to keep track of all the time spent on these activities. Anyone considering qualifying as an RE professional must keep real-time, meticulous records of their activities. A real estate tax professional can help determine if this is the best route. However, with the RE professional status, investors who want to offset ordinary income using rental property depreciation are simply out of luck.", "articleSection" : [ "Tax" ], "author" : { "@type" : "Person", "email" : "marketing@realized1031.com", "image" : "", "name" : "The Realized Team", "url" : "https://www.realized1031.com/blog/author/the-realized-team" }, "dateModified" : "2023-02-01T13:00:00+0000", "datePublished" : "2023-02-01T13:00:00+0000", "description" : "Real estate investors benefit from the tax shelter that real estate depreciation provides.", "headline" : "Can Rental Depreciation Offset Ordinary Income?", "image" : { "@type" : "ImageObject", "height" : 500, "url" : "https://733513.fs1.hubspotusercontent-na1.net/hubfs/733513/Images/photo/abstract/taking-notes-houses-IS-1257568363.jpg", "width" : 753 }, "mainEntityOfPage" : "https://www.realized1031.com/blog/can-rental-depreciation-offset-ordinary-income", "name" : "Can Rental Depreciation Offset Ordinary Income?", "publisher" : { "@type" : "Organization", "address" : { "@type" : "PostalAddress", "addressCountry" : "USA", "addressLocality" : "Austin", "addressRegion" : "TX", "postalCode" : "78701", "streetAddress" : "500 W 13th Street " }, "logo" : { "@type" : "ImageObject", "height" : 60, "url" : "http://www.realized1031.com/hubfs/Images/Brand/Logo/Realized/Realized-Logo-Black-No-Margin-296x60-AMP.png", "width" : 296 }, "name" : "Realized" }, "thumbnailUrl" : "https://733513.fs1.hubspotusercontent-na1.net/hubfs/733513/Images/photo/abstract/taking-notes-houses-IS-1257568363.jpg" } ```