Round Rock, TX · Member since 2014 · 14 posts · 0 votes
First off, I realize nobody here is going to give CPA services for free. I am attempting get an idea of my taxes and found I am positive on my rental properties. So I am wondering how real estate produces a negative taxable income or if i am missing something. Here are the estimate nnumbers.
Income: 15900
Interest: 5500
Property tax: 3200
Insurance 1000
Depreciation: 4000
Other expenses: 0
Total: 13700
taxable: 2200
Understandably, other years will have maintenance and other expenses, however not 2700/years worth. How would cashflow producing real estate ever decrease taxable income?
Depreciation is a deductible expense, however it's not one that you technically pay out cash for year over year, so you've got a net cash income, but a net tax loss.
So in your example, if you had a higher purchase price on that house, the annual depreciation might be enough to put you in a tax loss situation every year, even though you're cash flowing.
This happens frequently for people who put more than 20% down on the purchase for some houses that don't rent for very much. Even though they don't have much income, they still cash flow, but then have the depreciation that causes them to realize a tax loss.
You get to depreciate roughtly 3.6% per year of the structure cost on SFR. This directly comes off your rental income. So, it is a shield. You hopefully will also get the benefits of appreciation. When you want to sell, if you 1031 out of the property you can defer 100% of the gain. You can theoretically defer ALL your profits until the day you die.
Depreciation is a deductible expense, however it's not one that you technically pay out cash for year over year, so you've got a net cash income, but a net tax loss.
So in your example, if you had a higher purchase price on that house, the annual depreciation might be enough to put you in a tax loss situation every year, even though you're cash flowing.
This happens frequently for people who put more than 20% down on the purchase for some houses that don't rent for very much. Even though they don't have much income, they still cash flow, but then have the depreciation that causes them to realize a tax loss.
Are you managing the property yourself or through a PM? PM fee should be part of the expenses to write off against rent income. If you manage the property yourself, did you drive over to inspect the property? The mileage is an expense. Do you use your cell phone to conduct rental related business? How often and when and for what? You may be able to expense part of the cell phone bill. Did you purchase things to repair your property? Remember to document and include the mileage.
Ask your CPA (hopefully it's someone who owns properties) to help you figure out what else you can categorize as business expense to write off against your rental income. It can be very aggressive as long as you understand / balance the risk of audit and tax penalty if you lose the audit.
My CPA has me writing off lawn maintenance, travel back and fourth to the house (I think it is .50 a mile from my primary) and some other smaller deductions. However, I think most of the tax benefit is found in the depreciation. If you had 20 of the same rentals, the first $80,000 in income is written off in depreciation. When scaling depreciation tax break it becomes substantial.
@Mark Creason And as Mark stated hopefully depreciation is only on paper. If you you are factoring in expenses such as maintenance and capital expenditures, so your property is being kept up, you are doing your part to fend off depreciation.