How do taxes work as a landlord

Question

You have to pay property taxes but are your leftover profits taxes the same as income from a regular job?  If so can you write off expenses(i.e. maintenance)?

Steven Hamilton II · Answer

Chris O'brien,

You will take your rent received.

Subtract Your expenses.
Management, maintenance, repairs, property taxes, mortgage interest.  You will then deduct depreciation. You depreciate your cost basis (total amount invested into the property) by 27.5 years.

Rental income is considered passive income; however, it is subject to the same rate as your wages; however, it is not subject to Social Security and Medicare.

Rental income is definitely not treated as dividends or capital gain.

Some people do chose to prepare their own tax returns; however, I will tell you on majority of those returns that I check, I find mistakes. Most often those mistakes are leaving money on the table.

-Steven

Wayne Brooks · Answer

Talk to a CPA.
  Basically, income less normal expenses--property tax, ins, repairs, management fees, etc.  (not capital improvements/expenditures) and less only the interest portion of your mtg payment, less depreciation equals taxable income/loss.  This is over simplified.

Harry M. · Answer

Steven Hamilton II - Thanks! I filled in a significant gap in my knowledge today thanks to you and Jon.
-Harry

Steven Hamilton II · Answer

Harry M.,

Yes, these costs are added to basis; however, be sure to keep things such a new flooring, cabinets etc. separate as they can be depreciated over their respective class lives rather than 27.5 years.

The main building and associated costs will be depreciated over 27.5 years, flooring over 5 years. appliances over 5 years. cabinets over 5 years. etc.

The correct way is purchase price - land value = basis.
Rehab = separately depreciated basis.

-Steven

Harry M. · Answer

Thanks Jon, I've got it now. I'm not doing the labor, just some of the shopping for materials.
-Harry

Jon Holdman · Answer

Before its rent ready that goes into the basis and gets depreciated.  Carpets, for example, get five year depreciation on the total cost for the materials and labor.  After its in service as a rental, it depends.  Replace the carpets and you take any remaining depreciation from the original ones and start a new five year depreciation on materials and labor.  Fixing a toilet?  The whole repair, parts and labor, is an immediate expense.

If you mean your own labor, that doesn't count at all.

Harry M. · Answer

Jon Holdman - thanks Jon, you rock! That makes sense. What about the labor component of the rehab? I know what to do with that after a property is in service as a rental, but what about before? Thanks again.

Jon Holdman · Answer

Harry M., yes, work done on the property before its rent ready gets added to the basis.  Yes, it gets depreciated.  Some things have shorter depreciation schedule.  Appliances and flooring, for example.

You generally won't use the land value from the tax assessment.  Instead, look a the percentage of the total value the assessor gives the land out of the total.  Then apply that percentage to your purchase price to get a value for your land.

Harry M. · Answer

Steven Hamilton II - Hey Steven, I have a related question (hopefully this is helpful to OP, as I don't mean to threadjack!). Rehab to rental situation. From what I understand, I have to treat the rehab costs a bit differently since the property is not in service as a rental yet. I've heard that those costs are instead added to the basis. Is that accurate? If so, I think I understand how that works if I were to resell, but in the meantime does adding this cost to the basis mean that I can now depreciate based on the new higher basis? Any difference in how the labor and materials components of the rehab should be treated? And does it get depreciated over 27.5 years with the rest of the property?  Also, in figuring out what part of the total basis can be depreciated, is it ok to do this: purchase price + rehab costs - land value per tax assessment = amount I can depreciate?

Sorry that this grew into a big multi-part question... Thanks in advance!   
-Harry

Steven Hamilton II · Answer

Jeremy VanBussum,

That is actually a separate tax. As Medicare tax is 1.45% for the employee and employer.  For the surtax is it it is 3.8% and that is on Net Investment Income over the threshold.

How do taxes work as a landlord

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