how do you do taxes

[Jeff Hogan]

I'm a first time investor and my tenant just paid his first months rent. Typically how much do you set aside for Taxes?

Any suggestions so I don't make a rookie mistake?

[Jon Holdman]

Without a loan, you could well have taxable income. However, you still have depreciation. Depreciation is based on the value of the improvements. That's the structures, but not the land. A rule of thumb is 80% of the value is the improvements, 20% is the land. You should really evaluate it, and get a better number for your properties.

You "depreciate" the improvements over 27.5 years. Without knowing what its worth, I'll use $100K for an example. Property's worth $100k, improvements are $80K. That makes depreciation $2909 a year or $242 a month. Assuming your expenses are actuals (vs. the "50% rule" estimate), and $300 is your actual cash flow, your taxable income would be $58 a month.

If your actuals are just taxes, insurance, and a few minor fixups, you'll at some point have a bigger expense. Maybe a month long vacancy while you get a new tenant or a larger repair. If so, you'll wipe out that remaining taxable income. Be sure to consider all your other expenses like a receipt book and mileage to the property.

If you really do have the $58 a month in taxable income, that gets taxed at your marginal rate. Assuming that's the worst case of 35%, you'd have a $20 tax bill each month.