Rental Income Tax Makes Me Hesitant...

6 Replies

Hey everyone!

This will be my first post so i apologize if its being stuffed in the wrong area of the Forum. 

My name is Chris, I just purchased my first home at 26 as a personal residence. Ive always been a believer in long term, dollar cost averaging, normal person investing. However...I have been bitten by the real estate bug. I am interested in buying my first rental property in the next year and am also interested in renting out my current home when the time comes to upgrade. Ive got my whole excel sheet rolling, analyzing potential investment properties and was feeling hopeful. 

A very stupid oversight of mine was not calculating in the inescapable rental property income tax... My question is 

How in the world can you break even while accumulating equity, let alone make a profit when the government is expecting 15-20% of your monthly rental income from a tenant? I could be wrong, but if I am contributing my income from the rental towards my total taxable income, the 3-500 dollars in positive cash flow is potentially not even enough to pay out uncle sam at the end of the year?? I am beginning to learn about the available deductions, but still.... It seems like an absolute deal breaker over the stock market (not that is by any means exempt from taxation) 

Can someone help me understand the proper way to view the situation? The true tax implications of purchasing a property for the purpose of renting? Was very excited to begin inserting myself into a new realm and am now feeling a little....discouraged lol. I am also curious when you go to sell the rental property - I am being, once again, taxed 15-20% on the sale of the home? Or is that only applicable to the equity "gains" while in ownership of the property?

Any insight is greatly appreciated, i look forward to accumulating a knowledge base from this site!

Thank you!

The taxable gain when you sell is just like stocks....taxed on the profit, costs subtracted from sales proceeds.  The only “tax problem” with a rental is that you can’t deduct the principle portion of your mtg pmt.....every other expense is deductible including depreciation (the building portion value divided by 27 years) roughly 3% of purchase cost.

@Chris Redmon


Income taxes can be very complex - Sometimes it is best to leave the compliance and strategies to the professionals. 

In short - you will report rental income if your gross rental receipts is greater than your expenses. The great thing about real estate is that we are allowed a non-cash expense called depreciation. This will bring our rental income down; potentially having it below $0.

You may also be subject to paying an income tax upon disposition of the property. However, there are strategies involved to lower it or defer it. 
Tax rates on the sale of a rental property are also favorable.