01Why the answer is usually zeroThe passive rule, and the only two ways out
The IRS keeps income in two buckets. Wages and practice income are active. Rental income is passive. A passive loss can only offset passive income. It cannot reach a salary.
That is the default outcome for everyone, including a high earner who buys a building purely as an investment. The depreciation is real and it is his, but it sits suspended, waiting for passive income that may never come, until he sells. Passive is not a penalty for doing something wrong. It is what happens when you do nothing special.
You get out of it in exactly two ways, and both are about your hours, not your money:
- Real estate professional status. 750+ hours a year in real property trades or businesses, and more than half of all working hours there, by you or your spouse on a joint return. Then material participation in the rentals on top. A physician working full time fails the second test automatically, which is why these plans usually run through a spouse.
- The short-term rental exception. Average stay of 7 days or less. The property is a business, not a rental, so the passive rule never applies and only material participation matters. This is the route most working professionals can actually reach.
There is a $25,000 allowance for active participants, but it phases out entirely by $150,000 of income, so it does nothing at the income levels this worksheet is built for. And buying into someone else's syndication as a limited partner is passive by definition, no matter what status you hold.
02The depreciation mathBasis, the carve-out, and what bonus does to it
Year one deduction, your share
| Component | Federal | State |
|---|
03Cash versus paperHow a property that makes money shows a loss
04Five-year scheduleThe cliff after year one
| Year | Federal depreciation | Reaches income | Federal saving | State saving | Running total |
|---|
05The bill when you sellRecapture, and what is actually permanent
Every dollar deducted lowers your basis, so the gain is larger by the same amount. Sale modeled at the start of year six, 3% annual appreciation, 5% selling costs.
A 1031 exchange rolls all of it into the next property. Holding until death erases it entirely through the step-up in basis. Without one of those two exits, this is a deferral with a rate spread inside it, not tax elimination.
06Assumptions and limitsRead before quoting any figure
- Placed in service in January. The cost segregation carve-out is split two-thirds to 5-year property and one-third to 15-year land improvements. A $5,000 study fee is expensed in year one.
- Fixed-rate loan amortizing over 30 years. Net operating income grows 3% a year. Only mortgage interest is deductible, not principal.
- Flat marginal rates, federal and state. A real return steps through brackets, and the state rate shown is a top marginal rate that may not apply to your whole deduction.
- State rates and bonus conformity are approximate, change frequently, and several states have partial or phased addback rules this cannot capture. Both fields are editable. Verify with a preparer licensed in your state.
- The excess business loss threshold, $626,000 joint and $313,000 single, is the 2025 figure and is indexed annually. Amounts above it carry forward as a net operating loss rather than being lost.
- Not modeled: alternative minimum tax, the qualified business income deduction, state tax as a federal deduction, section 179, partial dispositions, mid-quarter conventions for late-year purchases, state-level NOL suspensions, or local and city income taxes.