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If the borrower is able to document (per the table below) that the rental property was not in service the previous tax year, or was in service for only a portion of the previous tax year, the lender may determine qualifying rental income by using Schedule E income and expenses, and annualizing the income (or loss) calculation; or
Passive Income vs. Active Participation. Deducting all of the rental expenses and depreciation from the taxpayer's rental income may result in a loss. Because rental activities are generally considered passive activities, rental losses may not be fully deductible.educting all of the rental expenses and depreciation from the taxpayer's rental income may result in a loss. Because rental activities are generally considered passive activities, rental losses may not be fully deductible.