When the cost of owning leased property exceeds rental income, a negative debt-to-asset ratio exists. The difference representing the loss can usually be used to offset other capital gains.
In negative debt arrangements, interest is the most important part of the tax return. As long as your property is available for rent, interest on any amount you lent to the property is tax deductible, including payments used to purchase the property, perform repairs and improvements, or deal with tenant-related issues. However, only loans used for income-generating purposes are entitled to deductions. For example, if you borrow a loan to purchase real property and leased property, the tax deductible part is limited to the interest on the leased property, not the real property.
Investment property is not always negative. If the rent exceeds the cost of owning the property, with a favorable debt ratio, the owner can expect to pay taxes on the profits generated by the property.