Taxes for a newbie investor

6 Replies

Hi BP community, 

This was my first year diving into real estate and I successfully bought 2 single family rentals out of state. Now tax season approaches and I'm completely lost and nervous as to how I should file my taxes.

For reference, each sfr is under $140k, and are located in the state of Arkansas. I live in southern California. 

How do I do my taxes without screwing myself? 



Hey @Chris Donathan I did a lot of back and forth going through CPA after CPA for the past 5 years, and then interviewed about 7 of them prior to picking the one I have now. Ultimately you need to pick one that is good for your income, career, real estate, and can provide you the answers you are looking for while building wealth through the tax code loopholes provided (all legally of course). The best ability to do that is to make sure that CPA and tax pro knows the tax code and stays up on the tax code through out the year(s).

@Chris Donathan

How I understand it is that the cash flow from your rental/s is offset by the depreciation of the bldg/structure. Keep track of receipts that you think are related to your rental business including airfare or mileage if you drove there. You should also document any communication with your property manager (if you have one). Your CPA should ask you for these things, and now is the time to find one.

Here's a little education that will hopefully set your mind to rest. 

If you own the properties personally or in a single member LLC, then you'll report them on Page 1 of Schedule E. You list the rental income and then the expense. Google a Schedule E and the phrase and pdf, and you'll find a Schedule E. Look at Page 1. It shows a little linear situation - each of the properties across the top and down the side is income and about a dozen of the most common expenses you'll incur. Round up your totals and plug 'em in. Sometimes you get help - mortgage interest is reported to you annually on Form 1098. Sometimes it'll include the insurance and the real estate taxes too if you're paying them thru escrow.

Next comes depreciation of the house. Sounds scary but here's the deal - depreciation is basically deducting the cost of your rental over its useful life, which according to the IRS is 27.5. Allocate some of the settlement sheet total cost to land since you can't depreciate land (a topic for another day). If you rehabbed them you'll have ore additions to depreciate. Some, like tings you can take out and not do major structural damage have only a 5 year life so you can write them off faster, and if you know how to do it you can take their entire cost in the first year! This is just introductory information to give you the view from 10,000 feet and get you off the ledge.

Then watch out. Say you do all this, and thanks to depreciation you end up with a loss, but you don't see it anywhere on your tax return. That's because of something called passive activity loss limitations. As long as you have a day job, and do R/E on the side, the if your income exceeds $100K, your allowable loss slowly reduces and by the time you hit $150K, the current year loss is zero. The good news is that you don't lose that loss. It just waits around on the side until 1) your income drops below $150K, or 2) you sell the house. The losses accumulate and roll forward, getting reported in an attachment to your return called Form 8582.

You'll need to report the rental properties in the state n which they are located. The you report them on your own home state return, too, but to avoid double taxation, your home state lets you take a credit against the taxes paid to another jurisdiction

I could tell you even more, but that's enough for now. The bookkeeping/tax side of your investing is yet another skillset for you to get a working knowledge of, as you wade into real estate, just like negotiating, getting financing, deal analysis, tenant management and contractor management.

Jim Kennedy

@Chris Donathan

Congrats on a successful 2021!
Acquiring 2 rental properties out of state within 1 years is good for a first year!

There are two things that will make your return become different starting with your 2021 Tax Return
1) You will now be required to report rental income on your return
2) You will now be required to file a non-resident tax return with Arkansas

Best of luck in your search for a CPA