How does tax season work at the end of the day?

Question

I want this to be completely transparent for accuracy. I have not calculated my expenses yet but my W2 reported income was $73,380. I grossed approximately $13,000 this year on the rental properties. I understand that I can deduct the expenses and depreciation which would cause the rental income to eventually reach a negative number. That net loss, let’s say $5000 is subtracted from my W2 income and now what? Will my refund be higher than it would be without the rental properties?

I just want to know the bottom line, will I have a refund or will I have to pay?

David M. · Answer

@Thomas Ingrao

There is pretty much no way to answer your question...  Of course, other than consulting a professional, you should become a little more familiar with your tax filing.  You've already postulated a $5k net loss from your rentals.  So, subtract that from your taxable income and recalc your tax amount, or if you are within a tax bracket you can calc from the marginal tax bracket.  These are just rough pointers.

Joe Splitrock · Answer

Another factor is withholding amount. It is not just a matter of what your calculated tax ends up being, but also how much was withheld through the year. Stimulus checks (if you got any) are another wild card, because they were based on previous years income. That means if 2021 was higher or lower, it could affect how much stimulus you qualified for. That could increase refund or increase tax liability. This can be a big surprise for people.

It is very unlikely you will have a $5000 loss on $13,000 worth of income. Say your property was purchased for $180,000 with $30,00 land value. That gives you a depreciable basis of $150,000. Divide that by 27.5 and full years depreciation is $5454. Say you borrowed that money at 80% LTV, then your loan is $144,000. Assuming you were financed at 3.5% for 30 years, you will have paid around $5000 in interest. Say another $500 for insurance and that comes out to $10,954 which is still $2000 worth of income. In order to have a $5000 loss, there would be another $7000 worth of expenses. I know there are some other miscellaneous expenses and repairs, but probably not thousands more.

Lets say you end up with $2000 of carry over losses that you can deduct from W2 income, it basically adjusts your taxable income. Say you are in the $25 tax bracket, that means it could reduce tax liability by 25% of $2000 which is $500. Ultimately there are too many other factors to say what the net tax refund or bill will be. In my early investing years, I had some tax refunds, but now I have big tax bills. Taxes catch up with you if you do this long enough.

Joe Martella · Answer

This is why you should use a CPA.  I wouldn't go to a big box catch all service either.  Without using a professional you, most likely, are leaving money on the table.  There are so many more things to consider than the basics you discussed.  For example:  did you contribute to a 401k or traditional IRA?  That has an impact.  Did you do any repairs that can have accelerated depreciation?

If you insist on doing your own taxes, then it is time to do a crash course on taxes.  Check this forum post on tax books to read.Real Estate Tax Book? (biggerpockets.com)

J Zev J. · Answer

@Thomas Ingrao - There are lots of moving parts in a tax return (kids, spouses, withholdings, stimulus payments etc). If you want a rough estimate of your refund you can try the free tax calculator at Intuit at https://turbotax.intuit.com/ta...

Thomas Ingrao · Answer

That makes sense, thanks for the input. And I understand based off the information, you wouldn’t be able to guess a return, I just assume a return. Single man, no dependents, filing in New York. I don’t claim anything on my W4.

Greg Scott · Answer

I am not a tax preparer, but my understanding is that if your AGI is below $100K you can deduct up to $25K of real estate losses against your W2 income.

Whether or not you get a refund is not something anyone can predict from the information you posted here.

How does tax season work at the end of the day?

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