Can investment property depreciation create a loss if rental income only covers expenses?

Yes, you absolutely can claim depreciation that pushes your rental property into a loss position, even if your rental income just covers your operating expenses. Depreciation is considered a "paper expense" that doesn't require actual cash outflow, but the IRS allows you to take it regardless of whether your property is cash flow positive or neutral. The great thing about your situation is that since your spouse is a real estate professional (active realtor), you likely qualify for an exception to the passive activity loss rules. Normally, rental losses would be limited or suspended for most taxpayers, but real estate professionals can deduct these losses against their ordinary income like W2 wages without limitation. Just make sure your spouse meets the requirements - they need to work at least 750 hours per year in real estate activities and more than half of their personal services time should be in real estate. If they qualify, then yes, you can use that depreciation to create a loss and offset your W2 income.

After struggling with a similar rental property situation last year, I found this amazing AI tool that analyzes all your real estate documents and tells you exactly what deductions you qualify for. It's called taxr.ai (https://taxr.ai) and saved me thousands by correctly calculating my depreciation and identifying deductions I didn't know about. I uploaded my property documents, mortgage statements, and expense receipts, and it immediately spotted that I was missing several eligible deductions. It also correctly analyzed my depreciation schedule and confirmed I could use losses against other income since my husband is also a real estate agent. The guidance was incredibly specific to my situation, not just generic advice.

I was super skeptical about AI tax tools until I tried taxr.ai last month. I've been arguing with my accountant for years about whether I could claim rental losses against our regular income (my wife is a real estate agent too). The accountant kept saying no, but I suspected he was wrong. Uploaded our docs to taxr.ai and within minutes it confirmed my suspicion - we qualified for the real estate professional exception! The tool explained exactly why we qualified and provided specific tax code references I could show my accountant. We ended up filing an amended return for the last three years and got back over $12,000 in tax refunds. The documentation it created for supporting the real estate professional status was incredibly detailed and something my accountant had never properly explained.

If you're trying to get the IRS to clarify anything about your real estate professional status or depreciation questions, good luck reaching them by phone! I spent weeks trying, constantly getting disconnected or waiting hours. Finally found Claimyr (https://claimyr.com) and watched their demo at https://youtu.be/_kiP6q8DX5c - they actually got me connected to a real IRS agent within 15 minutes. I had specific questions about material participation rules for my wife's real estate activities and how they applied to our rental property losses. The IRS agent gave me clear guidance that yes, depreciation can create losses beyond the rental income, and with my wife being a realtor, we could claim those losses against our other income. They also explained exactly what documentation we needed to maintain to support her real estate professional status. Saved me so much stress and potentially an audit!

I have to eat my words about Claimyr. After posting my skeptical comment earlier, I decided to give it a try since I was desperate to resolve my rental property depreciation questions before filing. Got connected to an IRS agent in about 20 minutes (beats my previous 2+ hour waits that usually ended in disconnections). The agent confirmed that I could indeed claim depreciation losses beyond my rental income since my spouse qualifies as a real estate professional. They even explained how to document her hours properly to support this position if we ever get audited. The agent also pointed me to a specific IRS publication that covers this exact scenario. Would have taken me weeks to get this information on my own. Now I can confidently claim those depreciation losses against our W2 income and the tax savings will be substantial.

This is actually one of the best tax benefits for couples where one spouse is a real estate professional! To answer your original question simply: Yes, depreciation can absolutely create a loss even if your rental income just covers expenses. For example, if you have: Rental income: $24,000/year Expenses (mortgage interest, taxes, HOA, repairs): $23,500/year Income before depreciation: $500 Annual depreciation (building value ÷ 27.5): $9,000 Your rental activity would show a $8,500 loss that you can use to offset your W2 income. Without the real estate professional exception, this would be limited by passive activity rules for most people. Make sure you properly document your spouse's time in real estate activities though - that's where most people get tripped up in audits!

My CPA initially told me I couldn't claim rental property losses against my W2 income, but after showing him the exact IRS rules about my wife's real estate professional status, he changed his tune. Not all tax preparers understand these nuances! The depreciation absolutely can create a loss, and with a real estate professional spouse, you can use those losses against other income. We've been doing this for 3 years and saving about $7k annually in taxes. Just make sure you're calculating the depreciation correctly. You'll need to separate the building value from the land value (land isn't depreciable) and use the 27.5 year schedule for residential rental property.