The #1 legal tax break is write-off of interest of your first mortgage. Of course, getting that requires you to leverage real estate which has been a losing proposition the last few years.
Regarding rental property …
You can use any amount of rental property loss against passive (e.g. rental) income. However, there are limits when applying it towards regular (e.g. wage or investment) income.
Unless you are a real estate professional, the tax loss on rental property is limited to 25K per year taken against ordinary income. Once you make above 100K this amount is reduced $1 for every $2 you make and is thus eliminated at 150K (as waitingforbottom said).
If you make over this amount the tax loss is carried forward (tax loss carryover) until you either count it against rental property income or sell the property and count it against capital gains.
Tax loss on rental property has two components:
1. Actual losses (which are bad because this is negative cash flow).
2. Losses due to depreciation (Generally better since this is a “phantom” loss valued at about 3.6% of the value of your structure each year).
I would not buy rental property for the tax benefits. Buy for cash flow, appreciation or principal pay down (renter pays for your house over time). Consider the tax benefits a bonus. For example, if you make over 150K you can build up a large carryover loss in the early years. As the property seasons and cash flows better in the future (assuming rents increase at some point or the property is paid off) the income stream can be tax-free, because the carried-over tax loss can be counted against rental income *
* Disclaimer – I am not a lawyer or an accountant, but have prepared my own taxes for rental property owned over the past decade.
