Depreciation as a built-in loss
Unlike stocks, real estate generates paper losses through depreciation without you selling anything. Cost segregation and bonus depreciation can amplify this, creating losses that offset passive income from other properties or, for short-term rentals with material participation, ordinary income.
Freeing suspended losses at sale
Passive losses you could not use are suspended and carry forward. When you sell a property in a fully taxable sale, its suspended losses are generally released and can offset other income — a planning lever for the year you take a big gain elsewhere.
Timing sales and the lazy 1031
Some investors deliberately place a new property in service (with cost segregation) in the same year they sell an appreciated asset, so the fresh depreciation loss offsets the gain — sometimes called a lazy 1031. It offsets rather than defers, and depreciation recapture still applies later, so run the numbers first.
Frequently asked questions
Can real estate losses offset stock gains?
Suspended passive losses freed at the sale of a property can offset other income, including some gains, depending on your situation.
What is a lazy 1031?
Using a new property's cost-segregation depreciation loss to offset the gain from selling another property in the same year, instead of doing a formal 1031 exchange.
Does harvesting eliminate the tax?
It offsets or defers. Accelerated depreciation is recaptured at sale, so plan for that.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.