Are you Calculating for Tax?

Most Popular Reply

Nick Schoch
Commercial Mortgage Broker · San Diego, CA · Member since 2009 · 70 posts · 69 votes
7y

Most analyses I see consider property tax and other local taxes in their calculation of Net Operating Income. 

Regarding income tax, most properties are organized into entities that pass taxes through to the partners, each with their own tax situations and rates. As such, it is hard to include tax in your analysis since the tax amount is specific to the individual investor.

4Reply
See this reply in the discussion

26 Replies

Jump to latestLatest
  • Brian Adams
    Syndicator of Large Apartment Buildings · Glen Mills, PA · Member since 2009 · 1k+ posts · 1k+ votes
    7y

    @Derek Morrison be more specific

    property taxes - yes.

    1Reply
  • Nick Schoch
    Commercial Mortgage Broker · San Diego, CA · Member since 2009 · 70 posts · 69 votes
    7y

    Most analyses I see consider property tax and other local taxes in their calculation of Net Operating Income. 

    Regarding income tax, most properties are organized into entities that pass taxes through to the partners, each with their own tax situations and rates. As such, it is hard to include tax in your analysis since the tax amount is specific to the individual investor.

    4Reply
  • Derek Morrison
    OP
    Rental Property Investor · Marshfield, MA · Member since 2018 · 90 posts · 28 votes
    7y

    @Brian Adams income tax from rental income

    0Reply
  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    7y

    @Derek Morrison

    Everyone's income tax situation is different.
    Some people may be in the 10% bracket while someone may be in a 22% bracket.
    Some people live in a state with no income tax while others live in a high income tax state.

    With that said - Taxes are important but shouldn't be the be all-end all whether someone gets into a deal or not.

    Furthermore, real estate is great from a tax standpoint. You may actually be able to lower your taxable income with all the benefits.

    [email protected]917-280-8544
    Basit Siddiqi CPA4.979 Reviews
    View Page
    0Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    7y

    The wealthy absolutely consider the tax impact when comparing investment alternatives.

    1Reply
  • Ed Matson
    Investor · Stratford, CT · Member since 2015 · 258 posts · 230 votes
    7y

    @Derek Morrison - I consider the tax treatment when I compare alternatives.  Passive rental income is taxed differently (depreciation) than flipping income or interest income, so it absolutely makes a difference.

    1Reply
  • Anthony Wick
    Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
    7y

    I don't analyze income taxes, but I do analyze alternate investment options for my money. Such as, should I be placing more money in my Brokerage account or buying this investment property? 

    0Reply
  • Lawrence L.Pro Member
    Rental Property Investor · Bronx, NY · Member since 2008 · 144 posts · 64 votes
    7y

    @Brian Adams When someone purchases a property the property taxes don’t remain the same...is there a formula that you use or is used to underwrite the property taxes of a building that you are looking to purchase?

    0Reply
  • Derek Morrison
    OP
    Rental Property Investor · Marshfield, MA · Member since 2018 · 90 posts · 28 votes
    7y

    @Ed Matson can money for CapEx be set aside (ie $250 per month) pretax as a business expense?

    0Reply
  • Ed Matson
    Investor · Stratford, CT · Member since 2015 · 258 posts · 230 votes
    7y

    @Derek Morrison - I wish

    2Reply
  • Jason D.
    Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
    7y

    @Derek Morrison no. My properties are all paper losses, so the rental income is tax free.

    1Reply
  • Will Dixon
    Accountant · Corte Madera, CA · Member since 2018 · 73 posts · 88 votes
    7y

    @Derek Morrison for a rental property your principal payments are non deductible but you get to take depreciation expense over the life of the building and other capex. It depends on the property type, the allocation of land/building value, and your loan, which of these two items would create a greater change.

    You could have a deal that is cash flow positive but because the principal payments exceed depreciation your taxable income from the rental is higher than the cash you are receiving. On the other hand you could have depreciation that exceeds principal payments and have a taxable loss when in fact it is a cash flowing property.

    1Reply
  • Derek Morrison
    OP
    Rental Property Investor · Marshfield, MA · Member since 2018 · 90 posts · 28 votes
    7y

    @Will Dixon good tips Will! I was talking with my Dad about this last night (he's also an accountant) and he was telling me the various expenses that are tax deductible. But didn't get too deep into depreciation. That's some useful info.

    So if you're CF $500/mo and depreciation is only $400/mo, you'll be taxed on...$600? Or do I have my math incorrect?

    0Reply
  • Ian WalshBusiness Member
    Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    7y

    Yes.  All numbers are real.

    0Reply
  • Matthew McNeil
    Rental Property Investor · Boise/Portland · Member since 2017 · 709 posts · 742 votes
    7y

    What @Nick Schoch wrote...

    0Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    7y
    Originally posted by @Derek Morrison:

    Do you account for tax when you analyze a deal?

     Definitely.  If you flip, you will be highly surprised when 40% goes poof the following April.

    If you are planning an airbnb, you better factor in all Sch C taxes.

    If you wholesale, same.  Self-employment.  

    With buy and holds, I definitely factor in the land value per county asssesor.  Most of mine are 90-97% improvement but early on I had a couple only 50%.  Depreciation plays a large part of the tax implications of your rental over time. Not much to depreciate if land values are high as a portion of your PP.

    1Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    7y

    I do look at tax ramifications when comparing investments. However, keep in mind paying more taxes doesn't mean something is a bad investment. Paper loss sounds great, but generally that means you have large interest, depreciation and other expenses. In my experience the best investments often generate taxable income. The worst investments always have a tax loss. Always look for ways to optimize your taxes, but not to the point you chose bad investments just to generate loss.

    1Reply
  • Will Dixon
    Accountant · Corte Madera, CA · Member since 2018 · 73 posts · 88 votes
    7y

    @Derek Morrison if your CF is $500/mo and depreciation is $400/mo, in order to be taxed on $600 would mean your monthly principal payments are $500/mo

    $500 (CF) - $400 (Dep) + $500 (Principal) = $600 Taxable Income

    I can’t speak for all properties, but most of the time depreciation exceeds principal. I’m on my phone and can’t look above to see who had just posted but someone mentioned the land/improvement split. This is the main driver that makes depreciation greater than principal.

    2Reply
  • Account Closed
    Investor · Milwaukee, WI · Member since 2013 · 1k+ posts · 1k+ votes
    7y
    Originally posted by @Derek Morrison:

    @Will Dixon good tips Will! I was talking with my Dad about this last night (he's also an accountant) and he was telling me the various expenses that are tax deductible. But didn't get too deep into depreciation. That's some useful info.

    So if you're CF $500/mo and depreciation is only $400/mo, you'll be taxed on...$600? Or do I have my math incorrect?

    How do you get $600? Never mind.

    It's like any other business. Forget your cash flow, cash flow is what you have left after all expenses - cash flow is the actual money you put in your pocket every year. You might have a negative cash flow some years, and still owe taxes - ouch!!! That is because the IRS does not count money the way you might - but their way is not dumb either - annoying, but it makes sense and usually works out better, because there are sometimes limits to losses that can be claimed or at the very least, it is one more pain in the butt to keep track of those too and carry them over until they are all accounted for. I'm getting ahead of myself and into complicated territory.

    Anywhoos...

    Start with total income. This includes rents, possibly additional payments from tenants for utilities, laundry collections, maybe a garage rental - whatever - each and every penny the property pays you - that's your gross income. If it's money that came to you, it's income.

    Now from there, the IRS is ready to tax you on that amount! And if you do not report that amount, you are committing tax fraud.

    Then you deduct your expenses. These are the things you spent money on during the year and for the most part, everything is deductible. You can even deduct your mileage and stuff if you want to go there. There are numerous rules and caveats, but for now I'll explain the principle and depreciation.

    So one caveat is your mortgage payment. This must be separated into principle and interest. The interest is deducted dollar for dollar in the year it occurs. The principle however, is not deducted dollar for dollar. Instead, you deduct your principle through depreciation, which must be over a term of 27.5 years. So, if your mortgage is not in alignment with 27.5 years, you will be paying more or less per year than your actual principle expense. It does however, come out in the wash eventually. Obviously, the common 30 year mortgage is going to be the one that most closely aligns. However, if you have a 10-year for instance, you will pay more in principle than you can deduct in taxes by a significant amount. Ouch for the first 10 years, but it helps in the remaining 17.5 years.

    The caveat to the caveat here is your principle will include the cost of the land, and you can not depreciate that, nor do you get to expense it either (I think??? Would love to be wrong about that). So, you must deduct the value of the land from your cost basis, to arrive at your basis for depreciation.

    Make sense?

    The most important thing that can not be stressed enough, is to keep accurate records of every penny in and out. I prefer paper receipts myself, but others trust the digital world. I go paper because it's once and done, and no computer crash will hurt me. The IRS will not let you slide if your computer crashes.

    0Reply
  • Holly Williams
    Rental Property Investor · New York City · Member since 2014 · 208 posts · 271 votes
    7y

    The tax shelter that real estate investing provides, especially multifamily passive investments, is 99% of what I'm about.  My investments have changed my life, changed the lives of friends and family, and they are enabling me to do what I love.  Tax savings is HUGE part of that.

    Some of the benefits of a syndication where you are not in control though, are dependent upon how the syndicator is structuring things.  You need to ask the right questions, talk to a CPA (NOT a "financial advisor), about your particular tax situation, and if you work with partners, make sure that they are like-minded people who invest alongside you and share your goals.

    Keep More! 

    3Reply
  • Derek Morrison
    OP
    Rental Property Investor · Marshfield, MA · Member since 2018 · 90 posts · 28 votes
    7y

    @Account Closed That's a lot to take, in but very helpful information! I appreciate the time you took to type that out :)

    0Reply
  • Account Closed
    Investor · Milwaukee, WI · Member since 2013 · 1k+ posts · 1k+ votes
    7y
    Originally posted by @Derek Morrison:

    @Account Closed That's a lot to take, in but very helpful information! I appreciate the time you took to type that out :)

     You're welcome. Wait until you see how much time it takes to learn it!!! It's not rocket science, but there's a reason CPA's are busy.

    0Reply
  • Charles Kao
    Specialist · Grand Rapids, MI · Member since 2016 · 1k+ posts · 611 votes
    7y

    @Derek Morrison

    Property taxes after assessed value goes up yes but income not directly as I want to make sure I have a certain projected NOI regardless. I rather be taxed alot on 500 million then taxed nothing on 200 bucks. My accountant however does a great job of making sure I pay my fair share of taxes but not a cent more and I maximize every deduction possible.

    1Reply
  • Yonah WeissPro Member
    Cost Segregation Expert and Investor · Lakewood, NJ · Member since 2017 · 1k+ posts · 1k+ votes
    7y
    Originally posted by @Holly Williams:

    The tax shelter that real estate investing provides, especially multifamily passive investments, is 99% of what I'm about.  My investments have changed my life, changed the lives of friends and family, and they are enabling me to do what I love.  Tax savings is HUGE part of that.

    Some of the benefits of a syndication where you are not in control though, are dependent upon how the syndicator is structuring things.  You need to ask the right questions, talk to a CPA (NOT a "financial advisor), about your particular tax situation, and if you work with partners, make sure that they are like-minded people who invest alongside you and share your goals.

    Keep More! 

    The term "tax shelter' has a specific definition in taxes, and are treated differently than other entities. Real estate investing, and even through syndications are not considered tax shelters. I'm sure you were just using the term loosely Holly, and you meant it in general that you are able to 'shelter' the income you make from the properties through depreciation, etc.

    Of recent, syndication of conservation easement transactions that purport to give investors the opportunity to obtain charitable contribution deductions in amounts that significantly exceed the amount invested, are considered tax shelters.

    Great points, just wanted to clarify that one.

    1Reply
  • Diana Villalon
    Kailua-Kona, HI · Member since 2018 · 45 posts · 9 votes
    7y

    @Lawrence L. This is a great question, i know in my county the assessors site fives your the rate % rate.. so if the appraised value is around the sales prices, I expect the bee tax rate can be alculated using that information... anyone else know if this sounds right?

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free