can real estate depreciation offset stock capital gains

can real estate depreciation offset stock capital gains

Short summary: If you’re asking "can real estate depreciation offset stock capital gains?" the short, practical answer is: generally no. Depreciation on rental real estate generates passive losses that typically only offset passive income, not portfolio capital gains from stocks. There are limited exceptions—most notably qualifying as a real estate professional, the $25,000 active participation allowance, or the release of suspended passive losses when you dispose of the property. This article explains the rules, exceptions, reporting, practical strategies, and sample scenarios so you can plan tax-aware moves in your investment portfolio.

Overview

This guide explains whether and how can real estate depreciation offset stock capital gains. In most ordinary investor situations, rental real estate depreciation deductions create passive losses that cannot directly reduce taxable capital gains from stock sales. Exceptions exist but are narrow and have strict tests and phase-outs.

As of 2026-01-21, according to official IRS guidance and tax-practitioner sources (IRS Publications and practitioner summaries provided by TheRealEstateCPA and other tax specialists), the passive activity loss rules and depreciation recapture remain central to how depreciation and capital gains interact. Always verify current guidance with a qualified tax advisor before acting.

Key Tax Concepts

Depreciation (and accelerated depreciation)

Depreciation for real estate is an income-tax cost recovery mechanism that lets owners deduct the cost of a building over its useful life. For residential rental property the standard recovery period is 27.5 years; for commercial property it is 39 years. Depreciation creates a non-cash expense (a "paper loss") during ownership that reduces reported taxable rental income.

Accelerated methods and tax planning tools—such as cost segregation studies and bonus depreciation—allow early recognition of larger depreciation deductions in the first years of ownership. Those strategies increase near-term paper losses but also increase the amount potentially subject to depreciation recapture when the property is sold.

Capital Gains (stocks vs. real estate)

Capital gains are realized when you sell a capital asset for more than its adjusted basis. Stock sales produce capital gains (short-term if held one year or less; long-term if held more than one year), reported on Form 8949 and summarized on Schedule D of your Form 1040.

Real estate sales are often taxed as capital gains too, but they can involve additional character issues—such as whether the sale is treated on Form 4797 vs Schedule D and whether depreciation recapture applies—so the tax outcome for property differs from a typical stock sale.

Passive vs. Non‑Passive Income

The IRS distinguishes passive activities from non-passive (active) activities. Generally, rental real estate activities are passive regardless of your level of involvement unless you meet special tests (e.g., real estate professional and material participation rules). Portfolio income—such as dividends and capital gains from stocks—is treated as non-passive (often called "portfolio income").

Because passive losses generally can only offset passive income, a depreciation-related passive loss from rental property normally cannot be used to reduce capital gains from stocks.

How the Rules Apply to Offsetting Stock Gains

General Rule — Passive Loss Limitation

Answering the central question—can real estate depreciation offset stock capital gains?—the general rule is no. Depreciation deductions that create passive rental losses are constrained by the passive activity loss (PAL) rules and normally may only offset passive income. Capital gains from stocks are portfolio income, which is non-passive; the PAL rules therefore prevent direct offset of stock capital gains by passive rental depreciation losses in most cases.

Exceptions That Can Allow Offsets

There are a few specific exceptions where depreciation can effectively reduce non-passive income, including stock capital gains. These exceptions include:

• Real Estate Professional Status: If you qualify as a real estate professional under IRS rules and materially participate in the rental activities, the rental activity losses may be treated as non-passive. That transformation can allow those losses—potentially including depreciation—to offset non-passive income such as stock capital gains. The test is strict: more than 50% of personal services must be in real estate trades or businesses and you must perform over 750 hours of services in those businesses in the tax year.
• Active Participation Special Allowance: A limited exception allows up to $25,000 of rental real estate losses (including those arising from depreciation) to offset non-passive income for taxpayers who actively participate in the rental activity. This allowance phases out when modified adjusted gross income (MAGI) exceeds certain thresholds (phased out between $100,000 and $150,000 of MAGI for many taxpayers) and has eligibility requirements.
• Disposition Exception (Full Sale of the Activity): Suspended passive losses are carried forward and can be released to offset any income—including portfolio capital gains—when you dispose of your entire interest in the passive activity in a fully taxable transaction. That means if you sell the rental property outright, previously suspended depreciation losses are allowed in the year of sale and can offset non-passive income.
• Recharacterization on Sale: On sale of a property, capital gain arises for the appreciation portion; stock capital losses can offset capital gains on property sales. That is the reverse direction—capital losses from stocks can be used against capital gains from property sales. But depreciation deductions claimed during ownership don’t directly reduce stock gain taxes until they are realized via loss release or recharacterization on disposition.

Why “Paper” Depreciation Doesn’t Equal Immediate Cash Tax Savings for Stock Gains

Accelerated depreciation provides timing benefits by shifting taxable income across years, but it is a timing difference. It reduces taxable income in years you claim it, but the tax character of the resulting loss matters. If the loss is passive and you lack passive income to offset it, the loss becomes suspended and sits on your books until a qualifying event releases it.

Additionally, accelerated depreciation increases the amount that may be recaptured at sale—recapture is generally taxed at higher ordinary or special rates (for example, the unrecaptured Section 1250 gain rate up to 25%) which affects the long-term tax economics. Thus, depreciation is not a silver bullet to reduce stock capital gains immediately.

Related Tax Items to Understand

Depreciation Recapture

When you sell a depreciated property, the IRS requires you to "recapture" some or all of the depreciation deductions previously taken. For real property, unrecaptured Section 1250 gain can be taxed at a maximum 25% rate (federal) on the portion attributable to depreciation. Recapture increases taxable gain on sale and reduces the net benefit of earlier accelerated depreciation.

At‑Risk and Basis Rules

Losses from rental real estate are limited not only by passive activity rules but also by basis and at-risk rules. You cannot deduct losses in excess of your basis in the property or in excess of amounts at risk. Suspended losses in excess of basis remain suspended until basis is increased or the activity is disposed.

Net Investment Income Tax (NIIT) and State Taxes

Beyond ordinary income and capital gains tax, certain taxpayers may face the 3.8% Net Investment Income Tax (NIIT) on investment income, which includes capital gains and rental income in many scenarios. State and local taxes also affect the after-tax return and can have different rules for passive activity treatment or depreciation recapture. Consider both federal and state consequences when planning.

Practical Strategies and Alternatives

Tax Loss Harvesting (Stocks)

Because capital losses from stocks can directly offset capital gains from stocks, tax-loss harvesting of stock positions is often the most straightforward strategy to reduce taxes on stock capital gains. Selling losing positions to realize capital losses, then using those losses to offset gains or to carry forward, is typically more effective for reducing stock gain tax than relying on rental depreciation.

Investing in Depreciation‑Heavy Real Estate (Syndications / Funds)

Some passive real estate investments—such as syndicated deals or private funds—use cost segregation and bonus depreciation to generate large early-year passive losses. Investors who have passive income elsewhere or who can use those suspended losses upon sale may find this attractive. However, such investments are illiquid and come with business and market risk; also passive losses will not help offset stock capital gains unless you meet an exception (e.g., real estate professional) or those losses are later released.

1031 Exchange and Like‑Kind Strategies

A 1031 exchange allows deferral of capital gains and depreciation recapture when you swap one investment property for another like-kind property (subject to strict rules and timelines). Note: 1031 exchanges apply to real property—not to stocks—so they don’t help offset stock capital gains directly, but they can help defer taxes related to property sales.

Opportunity Zones / Other Deferral Vehicles

Investing gain proceeds in Qualified Opportunity Funds (QOFs) can defer and potentially reduce capital gains tax on the invested gain under Opportunity Zone rules. These mechanisms are distinct from depreciation offsets and have their own requirements and timelines; they also do not change how depreciation interacts with stock gains.

Timing and Portfolio Planning

Coordinate sale timing across your portfolio where possible. Use stock loss harvesting to offset stock gains, manage when rental losses are suspended or released, and plan real estate dispositions with awareness of basis, recapture, and passive loss carryforwards. Combining careful timing with a tax advisor’s guidance will yield the best tailored outcome.

Worked Examples (Short)

Example 1: Passive rental depreciation while owning property — why it does not offset stock gain in Year 1

Sam owns a rental house and claims $20,000 of depreciation that generates a $15,000 passive loss after rental income. Sam also sells stock this year and realizes $30,000 of long-term capital gains. Because Sam’s rental activity is passive and Sam does not qualify for the $25,000 allowance or real estate professional status, the $15,000 loss is suspended and cannot offset the $30,000 stock gain in Year 1.

Example 2: Real estate professional who materially participates — how a rental loss could offset a stock capital gain

Alex spends 1,200 hours a year and more than 50% of personal services working in real estate and materially participates in rental operations. Alex claims $40,000 of depreciation-driven loss. Because Alex qualifies as a real estate professional and materially participates, the rental loss is non-passive and may offset non-passive income. If Alex realized $30,000 of stock capital gains, the rental loss could reduce taxable income attributable to those gains (subject to other rules such as basis and at-risk limitations).

Example 3: Selling property and using stock capital losses to offset the capital gain from the property sale

Taylor sells a rental property for a taxable gain of $100,000 (including recaptured depreciation). In the same year Taylor realizes $60,000 of capital losses from stock positions. Those stock capital losses directly offset the $100,000 property capital gain on Schedule D, reducing taxable capital gains. This demonstrates that capital losses from stocks can offset capital gains from property sales—one direction that works—but it’s not the same as passive depreciation losses offsetting stock gains while property is still owned.

Limitations, Risks, and Common Pitfalls

• Aggressive Characterization and Audit Risk: Claiming non-passive status or material participation to offset portfolio gains can raise audit risk if you cannot substantiate hours and facts. Keep contemporaneous records.
• Depreciation Recapture: Accelerating depreciation today can increase recapture tax on sale—consider the full lifetime tax outcome, not just early-year benefits.
• Phase-Outs and Thresholds: The $25,000 active participation allowance phases out for higher-income taxpayers. Real estate professional status has strict hour and activity tests.
• Illiquidity and Investment Risk: Syndications that generate large passive losses are often illiquid and involve business risks. Don’t buy an investment solely for a tax benefit without evaluating fundamentals.
• State Taxes and Other Jurisdictions: State tax rules may differ and may not follow federal passive loss or recapture treatments.

Reporting and Forms

Common IRS publications and forms you’ll encounter include:

• IRS Publication 925 — Passive Activity and At-Risk Rules
• IRS Publication 544 — Sales and Other Dispositions of Assets
• IRS Publication 551 — Basis of Assets
• Schedule E (Form 1040) — Supplemental Income and Loss (rental income/loss)
• Form 8949 and Schedule D (Form 1040) — Sales and Other Dispositions of Capital Assets; capital gains and losses (stocks)
• Form 4797 — Sales of Business Property (when sale is treated as business property)

Maintain thorough records: acquisition and disposition dates, purchase price, improvements, depreciation schedules, cost segregation reports, evidence of hours/material participation, and at-risk/basis calculations.

Practical Steps / Checklist for Investors Considering This Strategy

1. Consult a qualified CPA or tax advisor to confirm how rules apply to your facts.
2. Determine whether your rental activity is passive or non-passive and whether you meet the real estate professional or active participation tests.
3. Track basis, accumulated depreciation, suspended passive losses, and at-risk amounts each year.
4. Consider harvesting stock losses to directly offset stock capital gains instead of relying on passive depreciation deductions.
5. If using depreciation-heavy investments (syndications, cost segregation), evaluate liquidity, recapture risk, and how suspended losses will be used or released.
6. Plan sale timing and use dispositions strategically; remember suspended passive losses release upon a full disposition of the activity.
7. Keep contemporaneous records and documentation in case of IRS inquiries.

Further Reading and Sources

Primary authorities and practitioner sources used to build this summary include IRS Publication 925 (Passive Activity and At-Risk Rules), IRS Publication 544 (Sales and Dispositions), IRS Publication 551 (Basis), practitioner guidance from respected tax specialists, and tax-research institutions. As of 2026-01-21, authoritative IRS guidance and published practitioner analyses remain the primary sources for current rules; practitioners such as TheRealEstateCPA, tax-education outlets, and academic tax research (e.g., AQR) provide applied commentary and examples.

Note: Reporting and practitioner articles cited in industry summaries commonly include quantifiable metrics for markets and investment vehicles. When evaluating any product or service, check the underlying data (market cap, trading volume, on-chain activity, security incidents, institutional adoption) in current, verifiable sources and consult a professional.

Legal and Professional Disclaimer

This article is for informational purposes only and does not constitute tax, legal, or investment advice. Rules and interpretations change over time. Consult a qualified CPA, tax attorney, or licensed financial professional about your specific situation before making tax, investment, or legal decisions.

Practical Closing and Call to Action

Want to coordinate stock and real estate moves with tax-aware tools? Speak with a tax professional to confirm whether "can real estate depreciation offset stock capital gains" applies in your case, and consider portfolio moves like stock tax-loss harvesting or structuring real estate investments appropriately. If you use crypto or Web3 services as part of your portfolio, consider Bitget Wallet for secure custody and Bitget for trading—learn more and explore tools that help manage positions and tax-aware strategies.

Key takeaway: for most taxpayers, the straight answer to "can real estate depreciation offset stock capital gains" is no—unless you meet narrow exceptions. Plan with a tax advisor and keep clear records to use depreciation and capital losses effectively.

Reporting date note: As of 2026-01-21, according to IRS publications and practitioner summaries, the rules summarized here reflect current federal guidance and common practitioner interpretation.