My real estate properties show a profit

Investor · St. Louis, MO · Member since 2019 · 28 posts · 11 votes

I keep hearing that while you should be cash flowing positively, you should be showing a loss on taxes for your rentals. I've deducted every repair, interest, tax, insurance, depreciation, etc. that I have put into the property and I guess the straight line depreciation just isn't enough to push us into a net loss on taxes. Am I doing something wrong or missing something here? Thanks for any advice!

2 Reply

28 views

Most Popular Reply

Jeff He

Investor · Member since 2019 · 145 posts · 131 votes

Sounds like you got yourself a really good property. :) Congrats!

You should take everyone who comments on this thread out for dinner and write that as an expense. jkjk

6 Reply

See this reply in the discussion

16 Replies

Jump to latestLatest

Sort by

Jeff He
Investor · Member since 2019 · 145 posts · 131 votes
4y
Sounds like you got yourself a really good property. :) Congrats!
You should take everyone who comments on this thread out for dinner and write that as an expense. jkjk
6 Reply
Jason Sinclair
OP
Investor · St. Louis, MO · Member since 2019 · 28 posts · 11 votes
4y
@Jeff He, first off - I love the creative thinking, that was awesome :)
Then just to add to my post, I certainly don’t mean to humble-brag - I just want to make sure I’m not missing something obvious. I appreciate these forums and collaboration immensely!

0 Reply
Terrell Garren
Rental Property Investor · Concord, NC · Member since 2016 · 1k+ posts · 3k+ votes
4y
Assuming you are not missing any deductions, paying taxes is not a bad thing. Paying taxes reflects making money. I'm in the same boat with no loan interest to write off.
3 Reply
Scott E.
Contractor · Scottsdale, AZ · Member since 2010 · 2k+ posts · 3k+ votes
4y
I've always reported some income on my rentals. Not sure who is saying that you should show a loss on your taxes for rentals. Everybody's situation is different, but I would argue that you should not be showing a loss on your taxes for rentals if possible.
Think about getting another loan down the road. While lenders will take into account things like depreciation and give you credit back for some of those "expenses," it's going to be tough for a lender to get your debt-to-income ratio in line if you're reporting no income on your tax returns.
4 Reply
Tommy Parker
Property Manager · Charlotte, NC · Member since 2022 · 269 posts · 135 votes
4y
@Jason Sinclair That's awesome! Keep up the good work.
2 Reply
Zachary Inman
Specialist · Indianapolis, IN · Member since 2021 · 312 posts · 282 votes
4y
It typically only is effective in the early years because of deferred maintenance and capex. Seems like you have a smooth sailing operation.
3 Reply
Carini Rochester
Investor · Rochester, NY · Member since 2016 · 576 posts · 358 votes
4y
There was a recent Bigger Pockets Real Estate Podcast where David Greene was explaining that to keep maximizing his depreciation deduction, and to keep his taxes as low as possible, he had to keep buying more (usually more expensive) properties. Analogy: To keep an internal combustion engine running, the engine has to keep exploding little bits of gasoline.
To keep taxes low, investors have to keep investing in properties that will have depreciation.
That's how I understood it. You listen to it and see if I got it right.
3 Reply
Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
4y
Rentals are tax-advantaged, not necessarily a 'tax loss'. I've had true losers some years and I'd much rather pay some taxes on a winner.
Depreciation certainly helps plus there are no SE taxes due from receiving passive income.
As a self-manager the passive part used to bother me. This takes work! Show me the passive part of this!
Then I realized I am not earning the rents/income, I'm simply operating and maintaining the asset that is. Therefore, no FICA / SE taxes due. At sale it's pretty friendly, too. Tax-advantaged.
3 Reply
JD MartinBusiness Member
Moderator
Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
4y
Quote from @Carini Rochester:

There was a recent Bigger Pockets Real Estate Podcast where David Greene was explaining that to keep maximizing his depreciation deduction, and to keep his taxes as low as possible, he had to keep buying more (usually more expensive) properties. Analogy: To keep an internal combustion engine running, the engine has to keep exploding little bits of gasoline.
To keep taxes low, investors have to keep investing in properties that will have depreciation.
That's how I understood it. You listen to it and see if I got it right.

You have it right. If you are buying good properties that are producing healthy cash flow, you will continually depend on picking up "losers" to offset that income if you want to show paper losses. At the point in which you stop buying and renovating, you will realize healthy paper income. Which is not a bad thing - yes, you end up paying taxes, but you are also officially "profitable" if you go to refinance properties, get a portfolio loan, or just use your cash flow as a W2 substitute. The logical thing to do is continually grow until you reach a point where the profits from the previous properties cover all the income you want to make in a year plus the taxes owed on the profits.
Podcast Guest on Show #243
Skyline Properties
View Page
6 Reply
Brandon K Moore
Member since 2022 · 6 posts · 10 votes
4y
I think one of the other replies is correct. If you are paying taxes, that means that you are making money. There are some tax strategies that you could employ to lower your tax burden. I think anyone who guarantees you won't pay any taxes from real estate is probably a crook. There are great depreciation strategies and some other options for you. Tax planning will help you to manage your expectations and your tax liabilities.
2 Reply
Jacob Stevenson
Insurance Agent · Sioux City · Member since 2020 · 83 posts · 41 votes
4y
Quote from @Jason Sinclair:

I keep hearing that while you should be cash flowing positively, you should be showing a loss on taxes for your rentals. I've deducted every repair, interest, tax, insurance, depreciation, etc. that I have put into the property and I guess the straight line depreciation just isn't enough to push us into a net loss on taxes. Am I doing something wrong or missing something here? Thanks for any advice!

I've listened to many podcasts about using a tax pro that makes it so I don't have to pay taxes on my great properties. So much so that I started to shop for a new tax pro. Turns out, no other tax pro could find more deductions and I was doing everything I should have been.
As has been said, great properties produce income in my experience and you have to pay taxes. Keep up the great work, will be following this thread in hopes that someone tells me something different and I don't have to pay those taxes anymore!
1 Reply
Curtis Mears
Property Manager · Raleigh, NC · Member since 2014 · 729 posts · 596 votes
4y
@Jason Sinclair
Nope, you cc an still show a profit after all expenses and depr. I think much if it depends on the mortgage. If you do not have a mortgage or a small mortgage, you will probably show a profit.
1 Reply
John B ClarkPro Member
Waltham, MA · Member since 2021 · 38 posts · 26 votes
4y
I’m by far the rookie here, but it seems like what others are saying is good advice. I read the two books that BP has on tax strategies, and they don’t necessary talk about paying no taxes - they primarily talk about minimizing your tax liability based on certain tax code allowances available to RE investors and your individual situation. These other folks know way more than I do, though!
Congrats on the positive cash flow. Keep up the good work!
2 Reply
Dan H.Pro Member
Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
4y
Quote from @Jason Sinclair:

I keep hearing that while you should be cash flowing positively, you should be showing a loss on taxes for your rentals. I've deducted every repair, interest, tax, insurance, depreciation, etc. that I have put into the property and I guess the straight line depreciation just isn't enough to push us into a net loss on taxes. Am I doing something wrong or missing something here? Thanks for any advice!

Making a profit on RE is a good thing, but it could also be an indication that you are under leveraged. Note at 0% LTV, the cash flow is a lot different/better than 90% LTV, but your total return likely will not be optimized.

Investors have different comfort zones. Depending on your comfort, If your equity is not more then 40% (60% LTV) and you are showing a profit then you may not be under leverged. However, if your equity position is more than 40%, you are likely not optimizing the use of your money.

I strive for 75% loan to value, but this is very difficult to maintain. However if loan to value is under 60% than I am not leveraging my investment at a decent level and it may be time to extract some value and re-invest it on something that will produce a better return than trapped equity.
The questions that only you can answer is the profit (taxable income) coming at the expense of other returns (Could you better leverage the existing equity)? Would increasing the leverage cause you additional stress? Note a slightly better return at the expense of additional stress may not be worth it.
Good luck

3 Reply
Daniel DietzPro Member
Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
4y
Great discussion here. I wondered about that too when it happened. We tend to use moderate leverage of about 70-75% LTV and have places that are mostly less than 30 years old and in good repair when we bought them, so not a lot of cap ex or expensable repairs either.

I just got our taxes back and was looking over this very thing. In some VERY rounded real world numbers it looks something like this:
* 28 units worth about 2.5M with loans of about 1.7M
* Taxes showed about 100K in 'profit' BEFORE depreciation
* About 90K in depreciation leaving about 10K 'taxable'

So this means we owed NO tax on that 90K, NO FICA on any of it saving about 15K. ALSO, We also 'let' our renters pay down about 100K in loan balance (tax free), and the properties conservatively went up in value about 100K.

So the summary is we gained about 200K of equity tax free (this WILL be taxed 'some day' when/if we sell, or 'forgiven' if we hold until we pass) AND we had about 100K of 'current income' with only paying a few thousand in taxes on all of that.

Hope that helps. Dan Dietz
[email protected]608-524-4899
2 Reply
Jon KellyPro Member
Investor · Bethlehem, PA · Member since 2016 · 929 posts · 951 votes
4y
@Jason Sinclair a lot of really good feedback on this thread already. Tax advantages are wildly different from a fully rehabbed turn-key property vs. a distress property. If you buy a distressed property and use your capital to fix it up you should have a loss in year 1 and likely subsequent years.
However, having consistent losses usually isn't a good sign :)
1 Reply

Join the conversationCreate a free account to reply, vote on answers and follow this thread.