Can I deduct rental property loss against dividend income and capital gains?

This is a great question about rental property losses. Generally, rental activities are considered passive activities, and passive losses can only offset passive income. Depreciation losses on rental properties are still considered passive losses, even though they're not "cash" losses. The basic rule is that you can use rental losses to offset income from other passive activities (like other rental properties), but not against non-passive income like wages, active business income, or portfolio income (which includes your dividends and capital gains). There are a couple of exceptions worth noting. If you actively participate in the rental activity AND your modified adjusted gross income is less than $100,000, you might qualify to deduct up to $25,000 in rental losses against non-passive income. This exception phases out between $100,000-$150,000 MAGI. Another exception is if you qualify as a real estate professional for tax purposes, but that has strict time requirements (750+ hours working in real estate activities).

After reading your situation, I wanted to share my experience with a similar rental property tax situation. I spent weeks confused about passive loss limitations until I found taxr.ai (https://taxr.ai). It completely simplified the process for me by analyzing my rental documentation and explaining exactly how my depreciation losses could be applied. Their system identified that I had suspended passive losses from previous years that I didn't even realize could be carried forward. They also showed me how to properly document my level of participation to maximize any potential deductions. The best part was getting a clear breakdown of the passive activity loss limitations specific to my situation without having to decipher IRS publications.

Just wanted to follow up about my experience with taxr.ai after our conversation. I decided to give it a try with my rental property portfolio situation and I'm genuinely impressed. The system analyzed all three of my properties and showed me that I should actually be keeping them as separate activities rather than grouping them together based on my specific income situation. It identified about $13,500 in suspended passive losses from my previous returns that I can use when I sell one of my properties next year. The documentation analysis also flagged that I hadn't been correctly tracking my property management time, which could potentially help me qualify for partial active participation in the future. Money well spent compared to the hours I was spending confused by IRS publications!

For what it's worth, I ran into a similar situation with rental property passive losses and ended up needing to talk directly with someone at the IRS for clarification. Was on hold for 3+ HOURS before giving up. Then I found Claimyr (https://claimyr.com) which got me connected to an actual IRS agent in about 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent walked me through the exact regulations on passive activity losses and confirmed that in my situation, I couldn't offset dividend income with rental losses unless I qualified for one of the exceptions. But they also helped me understand how to properly document and track my suspended losses so they'd be there when I eventually sell. Honestly saved me from potentially making a costly mistake on my return.

OK I need to eat my words and follow up here. After being totally skeptical about Claimyr, I decided to try it anyway because I was desperate to talk to someone at the IRS about my rental property depreciation questions. I fully expected it to be a waste of money. But damn, it actually worked exactly as advertised. Their system called me back in about 35 minutes with an IRS agent already on the line. The agent clarified exactly how my suspended passive losses should be tracked and confirmed I was calculating my basis correctly after some renovations. Just having that peace of mind was worth it. I probably would have given up after an hour on hold if I tried calling myself. Not gonna lie, I'm impressed and will definitely use this again next year.

Another angle to consider - even though you can't use the passive losses against your dividend income now, those suspended losses reduce your tax basis in the property, which can benefit you when you eventually sell. If you're planning to hold the property long-term as an investment, those accumulated losses might actually work out better for your overall tax strategy.

Just curious - have you consulted with a CPA? My rental property has a much lower value but I still found it worthwhile to work with a tax professional who specializes in real estate. With a $1.6M property, you might find that the fee pays for itself in optimized tax strategies.

This is a complex situation that's worth getting right given the property value involved. One thing I'd add to the excellent advice already given - make sure you're properly documenting everything for the suspended passive losses. The IRS requires you to track these losses year by year, and with depreciation creating substantial annual losses on a $1.6M property, you'll likely be accumulating significant suspended losses. Also consider the long-term strategy here. While you can't use these losses against your dividend income now, they'll become fully deductible when you eventually sell the property. Given that you inherited it with a stepped-up basis, you might want to think about whether this property fits your overall investment strategy or if there are better alternatives. One last thought - if you're planning any major improvements to the property, make sure you understand the difference between repairs (immediately deductible) and improvements (must be depreciated over time). With depreciation already exceeding your rental income, maximizing immediate deductions through proper repair classifications could be beneficial.

I've been dealing with a similar inherited rental property situation for the past two years, so I completely understand your confusion about the passive loss rules. What everyone has explained about the passive activity limitations is spot-on - you won't be able to use those rental losses against your dividends and capital gains with your income level. One thing I wish someone had told me earlier: consider doing a cost segregation study on that $1.6M property. With such a high basis, you might be able to accelerate some of the depreciation by separating out components like flooring, fixtures, and landscaping that depreciate over 5-7 years instead of the standard 27.5 years for residential rental property. This could create even larger losses in the early years that get suspended, which means bigger deductions when you eventually sell. Also, since this is inherited property, make sure you're not missing any potential deductions for estate-related expenses or property preparation costs that might be immediately deductible rather than added to basis. The combination of high depreciation and proper expense classification can really maximize those suspended losses for future use.