Lets assume a Scenario: A new investor who invests $150K on a first rental property. No other retal or home mortgages.
IRS: US govt already allows a "Standard Deduction" of S24,400 (Married joint filing). The other option is "to itemize expenses if it crosses $24400)
With this standard 24K deduction already in place, how will rental property gain any additional tax benefit? For us to claim rental interest, tax etc we need to itemize instead of taking standard 24K deduction. For new investors, this itemization on one rental does NOT cross 24K so it doesnt makes sense.
Which means we take standard 24K deduction and end up paying tax on the "entire monthly rental".
Accountant · Slidell, LA · Member since 2019 · 382 posts · 272 votes
6y
@Account Closed You get to deduct your rental losses AND take the standard deduction. These are not mutually exclusive. Rental expenses are not claimed on Schedule A (itemized deductions), which goes away for most taxpayers. Rental expenses are reported on Schedule E, and most taxpayers can deduct up to $25k in rental losses against their W-2 income.
You can take the standard deduct + deduct any business expenses (prop taxes, maintenance, etc.). You do get tax benefits from real estate and they're a big benefit to why leveraged real estate investment is such a good ROI.
You can take the standard deduct + deduct any business expenses (prop taxes, maintenance, etc.). You do get tax benefits from real estate and they're a big benefit to why leveraged real estate investment is such a good ROI.
Thanks for quick reply Zach. But does that benefit apply only if we created a LLC and created a business entity?
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
6y
@Account Closed No, an llc has no tax benefit/difference. But do realize....
A good rental property doesn’t show any loss.
Depreciation (about 3% or so of the value of the property) is a paper loss/deduction, but it is in reality an “interest free” loan as you pay taxes on that deduction when you sell (if you don’t 1031 out)
“Passive losses” phase out and can’t be deducted from active or W-2 income over $150k/yr.
Tax savings are not the major reasons for buying real estate.
Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
6y
@Account Closed You can take the standard deduction, or calculate your itemized deductions on Schedule A - things like interest you paid on mortgage for your primary home (that you live in), property taxes also paid on your primary home, charitable contributions, medical expenses (over a certain amount), etc . However, that is totally separate from any expenses you have for your rental property, which would be listed on Schedule E. And you don't need a LLC to take these deductions.
It's always a good idea to consult with a tax professional who can provide you with specific advise for your unique tax situation.
Rental Property Investor · Gilbert, AZ · Member since 2017 · 40 posts · 23 votes
6y
@Account Closed
Always double check with a CPA/Tax person who is familiar with real estate in your area! In general think of it this way, normal pay (2W) wages pays the govt first then expenses, investment income pays expenses first then the govt gets their share.
So if you think of the rental as a business (LLC not required), all the expenses are taken out before the govt base is calculated.
If the rental has a note, or if there are any repairs, or any other expenses are taken out first, then the remaining amount (the profit) is taxed at a lower rate.
One huge benefit of having rental properties is the long term appreciation is only taxed at the sale of the property, or can be put off via 1031 exchange, possibly definitely.
I would encourage you to talk to a tax person. Definitely worth the few dollars for the information!
Accountant · Slidell, LA · Member since 2019 · 382 posts · 272 votes
6y
@Account Closed You get to deduct your rental losses AND take the standard deduction. These are not mutually exclusive. Rental expenses are not claimed on Schedule A (itemized deductions), which goes away for most taxpayers. Rental expenses are reported on Schedule E, and most taxpayers can deduct up to $25k in rental losses against their W-2 income.
Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
6y
@Rakesh Dholeh
Google a SchE form. Look at all the categories that you can claim for deductions. Download the instructions for SchE and you can read some more.
If your modified AGI is <$100k, you can take $25k of your rental losses that year also if have “materially participated” in your rental activities. it will come up quickly in Google and you can read the exact irs verbiage, it’s not rocket science and/or somebody may copy/paste it here for you(hopefully all of it if they do...). When your modified agi reaches $150k, that $25k is phased out to zero.
Realize that just because you can’t take the losses it doesn’t mean that you lose them. They are carried along as passive activity losses (PAL). So, if your property becomes positive one year, that gain will be offset by your carryover losses, ie the PAL.
Having a legal entity doesn’t change any of this. They are for asset protection, in general, not tax deductions.
Do some research/reading online to get the full story and talk to a professional or two to bring it all together. Good luck.
So Schedule E will show positive "Net Income" of $2400 "only" and tax needs to be paid for this $2400 per tax slab. The tax will NEVER be paid on pure rental number of $12000 ($1000 x 12) immaterial of Annual Gross Income.
So Schedule E will show a net loss of $3600. If AGI>150K, then we must carry forward this loss. If AGI<150K then it can be deducted as a loss from taxable income.
If anyone feels this is flawed and I am misleading other BP members please call out :)
Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
6y
@Account Closed
That's the short of it. Don't forget about material participation... Don't forget the detail that the $25k passive loss amount is full at $100k modified AGI and phases out at $150k modified AGI.
Also, the picture looks even better. You need to account for depreciation. You have a non-cash deduction equal to the improvements on the property divided by 27.5. You can't depreciate land. The IRS says the "useful" value of a house is 27.5 years. So, take the assessed values of the improvement and land portions of the property to determine a ratio, and multiple it against your purchase price (assuming you are buying a turnkey).