Levittown, PA · Member since 2014 · 1 post · 0 votes
I purchased a home with cash last month. I did a little clean up and now renting it out. I'm generating a nice monthly profit after all insurance, fees, taxes, upkeep, etc. I'd like to save this profit and put it towards another investment, maybe in 2015.
Besides saving the monthly profit to pay taxes then keeping the rest, what are my other options?
I'm hoping there is a legal way for me to save this money, not pay taxes, and then put the money into another unit.
Investor · Chicago, IL · Member since 2012 · 13 posts · 0 votes
12y
Rental income is treated as ordinary taxable income, but one way to not pay taxes on it is reinvesting the rental income into the property if the property needs rehab. It has to be necessary rehab though, not upgrades of any sorts from what I believe.
Rental income is reported on Schedule E, but the net rental income is still taxed at ordinary income tax rates. Whether owned personally or by a pass-through business entity, the rental income can not really be taxed at a lower rate than other primary income.
@Account Closed
The monthly rental income you get from your property is "cashflow" or a "return on capital". You have profit when you sell the property for more than you paid for it. Your net positive rental income is taxable income, regardless of what you do with it.
You do have options to minimize the tax on the income your cashflow generates. If you save the monthly cash flow in a savings account, the interest earned on that account is taxable. If you use the monthly cash flow to purchase municipal bonds issued by an entity in your state of residence, then the interest earned on those municipal bonds would be tax free income for your federal tax return and for most state income tax returns as well. Of course, putting your savings into a non-interest bearing account eliminates any taxable earnings your savings might generate.
Investor · Pawleys Island, SC · Member since 2008 · 1k+ posts · 837 votes
12y
Originally posted by @Pawan Wahi:
I meant to say...
Probably best not to include ALL the rental income directly with your primary income - you get taxed at a higher rate.
There are legal ways to minimize the tax impact on your income. Best to consult with your Tax Accountant.
Please share. I am not aware of any legal ways to exclude rental income from your tax return in the scenario outlined in the original post. If you know a way, I would like to learn.