First, I'm not a CPA or an accountant, so if anyone disagree with me, seriously consider the fact that they may be right and I may be wrong... :)
Depending on how the property is held (business entity or personally) will impact this analysis a bit. But here are the basics assuming he owns the property personally and all income/expenses go right onto his personal 1040...
The property equity, any rehab costs (prior to renting) and capital expenses are all considered Fixed Assets and go right to the Balance Sheet (in other words, they don't count towards income or expense until sold).
All rents, application fees, late fees, etc (basically, all income) are considered Income in the year it was received and gets added to the top line of your tax return.
All expenses -- taxes, insurance, maintenance, property management, interest on your loan payments, etc -- are considered Expenses, and are subtracted from your top-line income before your tax is calculated.
Likewise, depreciation is an Expense and is subtracted from the top line income. But, remember, you're only allowed to depreciate the cost of the dwelling, not the land -- so make sure you subtract out the land value (generally 10-25%) before determining depreciation amounts. Rental property is depreciated over 27.5 years.
So, in your example, the gross rents for the year are about $750 * 12 = $9000 (this assumes no vacancy loss). If he collected any other money -- late fees, application fees, etc -- these would be added in to the income as well.
So, $9000 is added to the person's top line income.
Let's assume 33% of the gross rents went to expenses (the 50% Rule would indicate more, but remember that includes vacancy and capital expenses, which aren't really Expenses in this calculation). That means $3000 was spent on expenses.
Additionally, he paid $550/month in mortgage, of which a percentage is interest. Let's say an average of $400/month of that payment went to interest. So, there is an interest expense of $400 * 12 = $4800.
Lastly, let's say that of the $60K property, 80% is the dwelling and 20% is the land value. So, he can depreciate 1/27 of ($60K * 80%) = $1777.77. For this example, let's round to $1800 for depreciation. That as well is considered an Expense.
So, total Expenses are:
$3300 + $4800 + $1800 = $9900
In total, we have $9000 in Income and $9900 in Expenses, so the net loss for this property would be $900. That $900 would come off his total income, and if he were in the 25% tax bracket, would result in a tax savings of about $225 for the year.
Hopefully I did that right...I'm sure someone else will check my work... :)
And again, I'm not a CPA or a tax professional in any way, shape or form...
J Scott, Lish Properties, LLC
E-Mail: [email protected]
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