Tax Deduction Clarification...

4 Replies

Can anyone help explain how this works for an investment property?  

In order to arrive at an estimated value of tax deductions for a rental property would you:

A) Add up your annual depreciation, operating expenses and mortgage interest and then multiply that amount by your current tax bracket for actual cash value. (so for example you had $20K total expenses multiplied by lets say a 20% tax bracket = $4,000 back in your taxes)


B) Calculate your total "paper loss" by subtracting the depreciation, mortgage interest & operating expenses by  your total rent revenue, and that is the amount that is "tax deductible"?  (so for example you had total rent revenue of 18K but total paper loss of 20K = $2,000 tax deductible) ? 

Noob question I know.... 

Keep in mind if your adjusted gross income is over 150k. That means that you may not be able to deduct the loss in the current year.

Thanks Steven....I am in fact over that limit but my understanding is that i would be able then to "carry forward" the to take advantage when i sell.  

In that case would you add up all the "paper losses" over the years held in order to arrive at your tax deductible amount, or would you be able to add all your operating expenses and ignore the revenue in order to arrive at tax deductible amount?    

Checkout IRS schedule E. your income level and wether you are classified as a real estate professional will also play a roll in the overall tax. Talk to your accountant for sure. He has all your info. Your 2nd example is probably closer to being correct but your particular circumstances can change that. 

A is not correct 

B :  "so for example you had total rent revenue of 18K but total paper loss of 20K = $2,000 tax deductible)"

That statement is little confusing. Let's say: 

 Rental income: 18k 

Expenses: 20k (This is the deduction as deduction on your tax return) 

Loss = (2)k (This is the loss that you might be able to use in current year if you are under certain threshold and met certain requirement or carry it forward)