IRS allowable depreciation on residential property that shows no income

Any day the property is rented for less than fair-market value is a "personal use" day. If it was rented below fair-market value for the entire year, then you cannot deduct any rental expenses and have been filing incorrectly.

From 1040 Schedule E instructions (I bolded key items):

If you rented out a dwelling unit that you also used for personal purposes during the year, you may not be able to deduct all the expenses for the rental part. "Dwelling unit" (unit) means a house, apartment, condominium, mobile home, boat, or similar property.

For each property listed on line 1a, report the number of days in the year each property was rented at fair rental value and the number of days of personal use.

A day of personal use is any day, or part of a day, that the unit was used by:

• You for personal purposes,
• Any other person for personal purposes, if that person owns part of the unit (unless rented to that person under a "shared equity" financing agreement),
• Anyone in your family (or in the family of someone else who owns part of the unit), unless the unit is rented at a fair rental price to that person as his or her main home,
• Anyone who pays less than a fair rental price for the unit, or
• Anyone under an agreement that lets you use some other unit.

Do not count as personal use:

• Any day you spent working substantially full time repairing and maintaining the unit, even if family members used it for recreational purposes on that day, or
• Any days you used the unit as your main home before or after renting it or offering it for rent, if you rented or tried to rent it for at least 12 consecutive months (or for a period of less than 12 consecutive months at the end of which you sold or exchanged it).

Whether or not you can deduct expenses for the unit depends on whether or not you used the unit as a home in 2019. You used the unit as a home if your personal use of the unit was more than the greater of:

• 14 days, or
• 10% of the total days it was rented to others at a fair rental price.

If you did not use the unit as a home, you can deduct all your expenses for the rental part, subject to the at-risk rules and the passive activity loss rules explained earlier.

If you did use the unit as a home and rented the unit out for fewer than 15 days in 2019, do not report the rental income and do not deduct any rental expenses. If you itemize deductions on Schedule A, you can deduct allowable interest, taxes, and casualty losses.

If you did use the unit as a home and rented the unit out for 15 or more days in 2019, you may not be able to deduct all your rental expenses. See Pub. 527 for more information.

Regardless of whether you used the unit as a home, expenses related to days of personal use do not qualify as rental expenses. You must allocate your expenses based on the number of days of personal use to total use of the property. For example, you used your property for personal use for 7 days and rented it for 63 days. In most cases, 10% (7÷70) of your expenses are not rental expenses and cannot be deducted on Schedule E.

In your case, with no rental income showed but rental expenses being reported you likely need to amend some returns (consult a local tax professional).

In general, there is no requirement that your business/rental be profitable. There are legitimate instances where businesses lose money for many years. It is fairly common to have paper losses with rentals (your income exceeds expenses but for depreciation which drives it into negative territory) for many years. If you claim losses too frequently or in suspiciously large amounts it may draw IRS scrutiny as it could indicate that you are attempting to dodge taxes. If you're doing things properly then IRS scrutiny isn't something to worry about.