Income tax on rental properties

5 Replies

Hi everyone!  As a total newbie, I'm trying to figure out this game and am confused about how much and when do you have to pay income tax on a rental property.  If I collect $1000 in gross monthly rent, that's $12,000/year rental income.  From what I've read, I can deduct operating expense, depreciation, and mortgage interest (but not principal?).  On the webinar, posts, and articles, everyone calculates cash flow by deducting expenses which include principal AND interest (among other things).  Can we do this?  When do we pay income tax on the income generated on the rentals?  Any help would be greatly appreciated!

Originally posted by @Pete Tallerico :

Hi everyone!  As a total newbie, I'm trying to figure out this game and am confused about how much and when do you have to pay income tax on a rental property.  If I collect $1000 in gross monthly rent, that's $12,000/year rental income.  From what I've read, I can deduct operating expense, depreciation, and mortgage interest (but not principal?).  On the webinar, posts, and articles, everyone calculates cash flow by deducting expenses which include principal AND interest (among other things).  Can we do this?  When do we pay income tax on the income generated on the rentals?  Any help would be greatly appreciated!

 You will report all the income, and then deduct insurance, utilities, supplies, repairs, and mortgage interest.  Capital Expenses are depreciated, along with the property.  

The remaining profit is then added to your income and taxed as per your tax bracket, but we do not pay self employment taxes on it.  

Isuggest the BP book on tax strategies

https://www.biggerpockets.com/store/the-book-on-ta...

Here are a few articles that may help

https://www.biggerpockets.com/blogs/1174/51722-pay...

https://www.biggerpockets.com/blogs/7587/54748-tax...

https://www.biggerpockets.com/blogs/4445/50236-tax...

@Pete Tallerico Definitely reach out to a CPA with these questions. If you are looking for one in CT let me know, I can give you some recommendations. 

@Pete Tallerico  you are correct about interest NOT principal being an operating expense, and therefore only the interest not the principal portion being tax deductible. 

The webinars you watched simplify things as people need to understand first what cashflow generated by the property, as principal repayment makes it harder to be cashflow positive. 

The IRS taxes you on your income statement, the webinars are showing a cashflow statement. The difference is principal flows, which are cashflows from financing activities, capex when you do  a big investment, and amortization, which get deducted as expense but are not cashflows.

You pay income tax for 2017 when it is due in Apr 2018 for most US residents/person.

Cash flow is not the same thing as taxable income. You hit on one of the differences: the payment of principal on a loan. While this is a negative amount for cash flow, it is not a tax deduction.

The other common item is depreciation. When you buy capital assets, you (usually) cannot immediately deduct their costs. Instead, you depreciate these costs over time. So, for cash flow purposes, you have an outgo when you purchase the assets and no outgo in future years. But, for income tax purposes, you have no deduction for original cost of the item, but you do have a deduction over time for depreciation.

Most of your questions seem to have been answered here except for the when.  Once you have significant 1099 income (meaning income not from a job where an employer deducts taxes from your pay)  you will have to pay quarterly taxes that are calculated using estimates that you generated when filing your taxes for the previous year.

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