Ask an advisor what clients say when a rental is quietly losing money, and you'll hear a version of the same line. "I'm keeping it for the depreciation." It's one of the most common reasons people give for holding onto a property that, by any other measure, they should probably sell. The write-off is doing the heavy lifting, the thinking goes, sheltering income in the background, so the property earns its place even when the cash flow says otherwise.
For a lot of clients, that write-off is doing nothing at all.
Depreciation creates a paper loss on the property. But rental real estate losses are passive by default, and passive losses come with a rule most owners have never heard of: they can't offset your salary, your business income, or your portfolio gains. They can only offset other passive income. There's one narrow exception, a $25,000 allowance the tax code lets middle-income owners use against ordinary income, but it shrinks as income rises and disappears entirely once you are earning what most of an advisor's clients earn. Above that line, unless you qualify as a real estate professional, the depreciation loss doesn't reduce your taxes by a dollar. It gets suspended. Carried forward. Parked in a column on a tax form, waiting.
I saw this recently on a real property. A high earner had a former home he had converted to a rental. It was bleeding about $67,000 a year, money he was covering out of his own pocket, and he was holding it, in his own words, for the depreciation. When we actually ran it, the picture flipped. His income was well past the point where the tax code lets you use rental losses against it, and he wasn't a real estate professional. So not one dollar of those write-offs was touching his tax bill. More than $148,000 of losses had already piled up, suspended, doing nothing. He was paying real money, every year, to hold an asset for a tax benefit he wasn't receiving.
Here's the part that turns the whole thing over. Those suspended losses aren't gone. They unlock. But they unlock on one condition: he sells the property, in a fully taxable sale. The moment he disposes of it, the whole stack is freed, and the write-offs he could never use become ordinary deductions against his income, all in the year he sells. The shelter he has been holding the property to keep is the shelter he only gets by letting the property go. And a 1031 exchange won't free it either, because that isn't a taxable sale. It carries the suspended losses forward into the next property, still locked, still waiting. Holding for the depreciation, it turns out, is the one strategy that guarantees he never uses it.
None of this is visible in a plan. The plan sees rent coming in and a mortgage going out. It doesn't know his losses are passive, or that his income is over the line, or that he never made the real estate professional election. The tax return is worse, because it makes the depreciation look like it's working. The deduction sits right there on the schedule. What the return doesn't show, unless you know to look for the carryforward, is that the deduction is being disallowed the same year it's taken, quietly stacking up in a suspended-loss balance the client has never once been told about.
So the belief goes unchallenged, year after year, and the client keeps paying to hold. An advisor who knows the losses are locked can finally have the real conversation. Maybe the move is to sell and unlock the whole stack at once, which also happens to solve the cash drain. Maybe there is passive income elsewhere in the portfolio to absorb them. Maybe the real estate professional path fits and is worth the hours it takes. The answer depends on the client. But it starts from the truth, which is that "I'm holding for the depreciation" was never actually happening.
That's the altitude this works at. Not analyzing the property to say what it's worth. Reading what it's actually doing to the tax bill, and telling the client the thing their return and their own instinct both quietly hide.
Market Implications Right Now
The rule that traps those losses is widely misunderstood, even by people who own rentals for a living. Under the IRS's passive activity rules, rental real estate losses can offset ordinary income only through a single $25,000 allowance, and that allowance shrinks as income climbs past $100,000 and vanishes completely at $150,000. Above that, the losses are suspended until you either generate passive income to absorb them or sell the property outright. The one clean escape is qualifying as a real estate professional, which takes more than 750 hours a year of material participation, a bar most people with a day job can't clear.
That $150,000 line is the problem, because it lands almost exactly where an advisor's clients live. It's not a high bar in 2026. A dual-income household or a small-business owner clears it without feeling wealthy, and the moment they do, the rental losses they assume are helping them stop helping. The threshold was meant to separate the rich from everyone else. Today it separates most affluent rental owners from the deduction they think they are getting.
This isn't a fringe problem. According to the IRS's Statistics of Income, individual taxpayers carried $98.7 billion in suspended rental real estate losses into 2023, the most recent year reported, across roughly 1.8 million returns. That's 1.8 million owners sitting on rental losses the tax code wouldn't let them use that year, parked in a suspended-loss column, doing nothing until the day they sell.
That's the gap. The deduction shows up on the return every year and looks like a benefit. Whether it actually is one depends on a rule the plan never checks and the client has never heard of.
Leveridge models exactly this for every investment property in a client's portfolio: hold, sell, or exchange.
