Tax Benefits of Rental Properties
Fairview Heights, IL · Member since 2014 · 15 posts · 1 vote
Hi All,
I understand that there are great tax benefits/write offs as it relates to the purchases you have made towards your rental property like depreciation, maintenance fees etc...My question is...Are there any tax benefits of simply owning a rental property? For instance, Will my personal taxable income be reduced by simply having the rental property or is the only way to benefit on my taxes is to write off the money I have spent? This question is stemming from me trying to find new ways to reduce my overall taxable income as a single person and thought about rental properties as a way to do it...Any other ideas to reduce my taxable income as a single person because I don't have write offs for kids, personal home etc...???
Yes, a rental property can definitely lower your taxable income. If your rental property generates a negative cash flow, then every dollar you lose on the investment each year (up to $25K annually) could potentially save you 25¢ in taxes on your other ordinary income -- up to a point. If your annual MAGI is over $150K, this "tax benefit" is no longer available to you.
Rental ownership has a cost for things such as property taxes, hazard insurance, mortgage payments, maintenance, upkeep, HOA fees, etc. You have these expenses of ownership whether or not your property is tenant occupied. You also have rental operation expenses such as property management fees, legal fees, time and travel expenses whenever you show a property or do a moveout, advertising, etc.
The real tax benefit of rental property ownership over another form of investment is the ability to use depreciation to offset rental income. A property with a $6000 positive annual income on paper that has a deprecition expense of $6000 per year has no net taxable rental income. The $6000 positive cash flow is offset by the depreciation expense, and therefore, effectively giving you $6000 in tax-free income. If you can do this with four or five additional properties, you have a tax free income equivalent to the take home pay from a full time W-2 job for many Americans.
The point I want to make is that seasoned buy and hold investors do not buy a property, but instead, they buy the positive cash flow a property can generate. The tax benefits are rarely, if ever, a primary consideration -- just an additional perk to a good deal.
@Will Rodgers When you own a rental property, you will report your income and expenses on schedule e. Considering depreciation and various other deductions associated with the property, it is not uncommon for investors to show a loss on these properties. If you're income is under 150k, the IRS allows you to offset active income (w-2 wages from your day job) with the losses. It can be a great way to reduce your tax liability.
In addition to what Taylor mentioned, all expenses attributable to your rental are deducted.
In terms of reducing your taxable income, you should get with a CPA to review your financial picture. For example, are you contributing to an HSA (if eligible)? Do you contribute to a 401k? If you have a taxable brokerage account, are there opportunities for tax loss harvesting? These are all topics you want to discuss with your CPA.
Yes, a rental property can definitely lower your taxable income. If your rental property generates a negative cash flow, then every dollar you lose on the investment each year (up to $25K annually) could potentially save you 25¢ in taxes on your other ordinary income -- up to a point. If your annual MAGI is over $150K, this "tax benefit" is no longer available to you.
Rental ownership has a cost for things such as property taxes, hazard insurance, mortgage payments, maintenance, upkeep, HOA fees, etc. You have these expenses of ownership whether or not your property is tenant occupied. You also have rental operation expenses such as property management fees, legal fees, time and travel expenses whenever you show a property or do a moveout, advertising, etc.
The real tax benefit of rental property ownership over another form of investment is the ability to use depreciation to offset rental income. A property with a $6000 positive annual income on paper that has a deprecition expense of $6000 per year has no net taxable rental income. The $6000 positive cash flow is offset by the depreciation expense, and therefore, effectively giving you $6000 in tax-free income. If you can do this with four or five additional properties, you have a tax free income equivalent to the take home pay from a full time W-2 job for many Americans.
The point I want to make is that seasoned buy and hold investors do not buy a property, but instead, they buy the positive cash flow a property can generate. The tax benefits are rarely, if ever, a primary consideration -- just an additional perk to a good deal.
Hi All, Thanks so much for the detailed responses! Very Helpful
Thank you @Dave Toelkes . You were able to answer a lot of my questions with just one post.
Hello All,
I just want to touch on how 'rental income' can ALSO help with lowering other taxes too.
Lets way you have 25 units and after all of the 'real expenses' that you get to right off (compared to capital expenditures that you need to depreciate) like taxes, insurance, interest, small repairs, property management etc..... you have 30K of 'net income' that is taxable BEFORE depreciation.
Now on those same 25 units you get to write off 50K of depreciation each year, for about 27 years I think it is. You just lowered your 'profit', at least for tax purposes, from +30K to -20K that can carry over to your personal taxes.
Now go over to your taxes from your W-2 or in my case K-1 since I am self employed. Let's say at my 'day job' I have a taxable income of 50K. I get to take that -20K loss from my real estate and deduct that from my 'regular income' of 50K and end up with total taxable income of 30K, when in reality I had a total income, before depreciation, or 80K. It is like getting 50K tax free.
In my case, since I am self employed I need to cover both halves of SSI, federal and state taxes which add up to about 35%. So that depreciation saved me about 18K in taxes!
Overall I look at the profits from rentals as about 25% from 'cash flow', 30% from principal pay-down (25 year notes), 30% from appreciation (figuring 2%), and 15% from 'tax savings'.
So it is correct that most people dont invest BECAUSE of the tax benefits, it certainly can add up over time.
Dan Dietz