How will buying a 200k house and renting out impact Taxes?

10 Replies

First time buying a home. Home is in Massachusetts. Will be renting it out. 

Any clues on how my year end taxes (not property taxes) will be impacted by purchasing a home, and now having more income coming in. (besides putting me in a higher tax bracket)

Anything I should be prepared for? Sorry if this question is broad.

@Robert P.

Unfortunately, you won't receive accurate advice (at least nothing that I would follow) because you haven't provided nearly enough information for anyone to tell you how it will impact your tax position.

Sure, we can speak in very broad terms and say that your AGI will increase, or you will either take passive losses or they will build up over time, but none of that information will help you because it isn't specific to your unique situation.

This type of question is best to be had with a real estate CPA who will look at your prior tax returns, seek to understand your current tax and financial position, and then have an informative conversation with you about how this will affect your tax position now, and in the future.

Originally posted by @Brandon Hall :

@Robert P.

Unfortunately, you won't receive accurate advice (at least nothing that I would follow) because you haven't provided nearly enough information for anyone to tell you how it will impact your tax position.

Sure, we can speak in very broad terms and say that your AGI will increase, or you will either take passive losses or they will build up over time, but none of that information will help you because it isn't specific to your unique situation.

This type of question is best to be had with a real estate CPA who will look at your prior tax returns, seek to understand your current tax and financial position, and then have an informative conversation with you about how this will affect your tax position now, and in the future.

 Generally speaking, what things could be impacted? Is it only my AGI? You seem to know more about this than I do. I'm just looking for areas of concern to then go forward and investigate/have a conversation about.

It may really decrease you taxes as your rental house depreciation will work against your income, as well as your closing expenses including appraisal and inspection. Just start communication with your tax advisor right now and you will get more details.
Originally posted by @Jane A. :
It may really decrease you taxes as your rental house depreciation will work against your income, as well as your closing expenses including appraisal and inspection. Just start communication with your tax advisor right now and you will get more details.

 I don't have a tax advisor at the moment. Perhaps I should look into getting one. Would you say that is extremely important to have? This is my only property and don't plan on acquiring any others for years to come.

Could you elaborate on what you mean by the depreciation working against my income, closing, appraisal and inspection?

You will be filing a 1040 with schedule E.  Look at schedule E now...you need receipts to back up your filing.  Then use last years filing to see what next year with schedule E will look like.

Just take any online tax software ( I use HR Block) and it will calculate everything for you. Just keep a track of all your income and expenses for this property. Online tax tool will ask you all questions and has a lot of comments for everything. It is fun to do it yourself as well. By the way tax professional from HR Bloch cost you below 1K for whole year unlimited access, you could discuss anything anytime. I like this opportunity.
Originally posted by @Jane A. :
Just take any online tax software ( I use HR Block) and it will calculate everything for you. Just keep a track of all your income and expenses for this property. Online tax tool will ask you all questions and has a lot of comments for everything. It is fun to do it yourself as well. By the way tax professional from HR Bloch cost you below 1K for whole year unlimited access, you could discuss anything anytime. I like this opportunity.

I think if the OP had half a clue, this might be decent advice. But TurboTax and the like do not walk you through carving out a portion of the purchase price to allocate to land. It doesn't talk about the VERY subtle differences between capital improvements vs Repairs & Maintenance. It does not talk about the different items on the HUD-1 and what are capitalized and what are current expenses.

@Robert - here is a VERY general breakdown of the scenario.

You file Schedule E to report your rental income and associated expenses.  From a cash standpoint, this should give you positive cash flow (or profit).  However, one of the expenses you will report on your Schedule E is depreciation.  You essentially take the total basis of your profit, divide it by 27.5 and you can deduct that amount every year against your profits.  This is often referred to having a cash profit but a tax loss.  

If you are in this situation, you may or may not be able to write off these losses depending on your overall tax situation such as other passive losses you may have, your overall income and other deductions, etc.  

If you have a tax profit as well as a cash profit, this can bump you up into the next bracket.  This is why you are being advised to seek a competent tax professional right now.  There are too many variables for anybody to accurately tell you what impact this will have for you.

Originally posted by @Linda Weygant :
Originally posted by @Jane Alstatt:
Just take any online tax software ( I use HR Block) and it will calculate everything for you. Just keep a track of all your income and expenses for this property. Online tax tool will ask you all questions and has a lot of comments for everything. It is fun to do it yourself as well. By the way tax professional from HR Bloch cost you below 1K for whole year unlimited access, you could discuss anything anytime. I like this opportunity.

I think if the OP had half a clue, this might be decent advice. But TurboTax and the like do not walk you through carving out a portion of the purchase price to allocate to land. It doesn't talk about the VERY subtle differences between capital improvements vs Repairs & Maintenance. It does not talk about the different items on the HUD-1 and what are capitalized and what are current expenses.

@Robert - here is a VERY general breakdown of the scenario.

You file Schedule E to report your rental income and associated expenses.  From a cash standpoint, this should give you positive cash flow (or profit).  However, one of the expenses you will report on your Schedule E is depreciation.  You essentially take the total basis of your profit, divide it by 27.5 and you can deduct that amount every year against your profits.  This is often referred to having a cash profit but a tax loss.  

If you are in this situation, you may or may not be able to write off these losses depending on your overall tax situation such as other passive losses you may have, your overall income and other deductions, etc.  

If you have a tax profit as well as a cash profit, this can bump you up into the next bracket.  This is why you are being advised to seek a competent tax professional right now.  There are too many variables for anybody to accurately tell you what impact this will have for you.

 Thanks, Linda. I did not know it was this complicated, and I appreciate the folks on BP letting me know this! I have something set up with a local CPA to discuss my personal situation. I appreciate the explanation of the Schedule E and property depreciation.

The depreciation can make a positive cash flow rental show a tax loss. This is what most new investors might miss. 

Say of the $200K price, $50K is attributable to land and $150K to the building. The first full year, you'd see $5455/yr depreciation. (The first parial year, it's prorated.)

The real question is if you are able to rent for a profit. If mortgage interest, principal payment, property tax, and expenses are more than the rent, you may have negative cash flow. Ignoring principal payment portion, if you are break-even, the depreciation might provide some tax savings. But it also lowers your basis. With no other permanent improvement expenses to increase basis, this means that in 28 years, you have a $50K basis, and a potential large tax bill when you sell this house for $400K.  

If you offer more details, members can give you a better idea if you'll have a tax bill from this investment. If you do, it's a good thing. It means you are profiting enough to actually show income. 

I highly recommend you start by reading "Every Landlord's Tax Deduction Guide" from Nolo.org.  This book will explain 99% of what you need to know.

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