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If your expenses outstrip the income, does anything need to be reported? If there is no net income, why depreciate?

Because a VR is considered an active investment, rather than a passive one like conventional rentals, there is no limit to the VR loss that can offset ordinary income. Even with conventional rentals you can deduct up to $25,000 against OI, so why on earth wouldn't you depreciate? Further, and Phil is certainly the voice of authority here, IIRC you don't have the choice but to depreciate a real estate investment. When you sell, you will still be expected to recapture depreciation even if you didn't take it. Sounds bizarre, I know, which makes me doubt my understanding every time I read it, but even not being a pro I've learned that common sense is not part of the IRS strategy.

Of course, the IRS will expect to see you treating this as a business, not a hobby or a tax deduction, with the intent to make money. You need to put the work in to show that you are trying to make money or they will disallow it as a business.

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