Losses on Tax Return

11 Replies

Howdy!

We recently filed our tax return and showed a pretty good profit on our rental. Our tax advisor said that he almost never sees profit on rental houses. I know you can repair the home to negate the profits, but is there a reason that we are the only profitable rental? Is it because we truly are the only profitable rental or are the other investors doing something that is 'hiding' their profit? Thanks for any advice.

Most don't do so well with rentals, they screw it all up. Some do well. What you can do is buy more and out pace the income with capex, depreciation, and a personal credit line with member loans to the biz, then find a point to level off and pay down some of that debt, then start the cycle again. Also your CPA could be worthless and you need to do some shopping.

Most people normally don't show income on paper after depreciation. 

If you'd like a second set of eyes on things feel free to shoot me a PM I'd be happy to take a quick look at your schedule E page and see if he's missing any thing 

Also I should mention there is strategy involved in taxes, real estate, all of it really.

If your CPA was just like "Oh wow you made money good job" and was't like "We should see if there's a way we can minimize your income on paper and related tax"...you may want a new CPA 

Thanks for all the tips. I guess I'm just confused as to why some people would have multiple rentals if they are not generating income. Should I be putting money back into the rental to make it sell at a higher price, rent for more, etc?

@Brianna H. - Because you are building an equity/asset.
Let's say your tax return showing up you lost $1000 every year for the next 30 years on a $150k property after taking into account income, expenses, etc.
So you lost $30k overall but you end up owning a $150k worth of asset and any rent on it thereafter is going into your pocket fully.

I'm going to venture a guess that your CPA doesn't do a whole lot of returns with rental property on them.

The ideal scenario is to have positive cash flow, but a tax loss, but that's not always best for every person, particularly those who don't want higher leverage on their rental properties.

Generally, a property that is owned outright or is in the last third of it's mortgage life will show pretty strong profits, even after depreciation. The mortgage interest is a pretty significant deduction and if it is very low or non-existent, you'll end up in this scenario.

Also, properties that were bought a long time ago in areas where rental markets have way outpaced the former purchase prices will be in your scenario as well.  I have one client that bought a mountain condo for $50,000 about 7 years ago, but it now rents out through AirBNB at an average of $3000 per month.  Ain't no amount of depreciation gonna help that scenario and he doesn't want a mortgage.

So if you own outright and don't want to (or can't) mortgage your property, or if you bought a while ago and end up in the scenario I've described above, you're going to be in the situation you described.

There's nothing wrong with it in the slightest if all of your other goals are otherwise being met.  Make sure your current CPA is depreciating and otherwise writing off everything appropriately.  

As the other posters have mentioned, you are most likely seeing the magic of depreciation. Of course, it doesn't rule out bad investments either. :) 

Claiming profits shows income. If you want banks to lend to you, you need to prove to them you have income to cover your debts. Every time you apply for a mortgage, banks will look at your tax return and calculate your debt to income ratio. If you always claim a loss, your income will put a strain on how much they will lend to you. Real estate is mainly an attractive investment because it can be leveraged.

Keep claiming profits and after two years the bank will consider it when calculating your debt to income. Now you can barrow more money and buy more income producing assets which show more profits on your taxes. The process continues and wealth is built

Claim losses and banks stop lending to you. Buying "buy and hold" properties all cash ends quickly.

Ramsey

@Brianna H.

Profit is what you hope to have when you sell the property for more than you paid for it.  The income you receive from your rental is cashflow.  While I disagree with your use of the term "profit" in your situation, having a positive (taxable) cash flow is not that uncommon.  I suggest that many long-time landlords with a multi-property portfolio have at least one property that has a positive cash flow. In about seven years, half of my rental holdings will be owned free and clear with a taxable cash flow.  I could keep buying additional properties and use mortgage interest and depreciation on the newly acquired properties to increase the offset against rental income, but my property acquisition phase is over.  At this point in my life, my goals for retirement include becoming debt free.  I don't know what the state of Social Security will be in a few years or even if Social Security will be around 15 years from now.  I plan to use the cash flow from my free and clear rentals to supplement my pension income.  Even though my rental income will be taxable, I don't see that as a problem