AGI over $150K. What do you pay taxes on?

Rochester, NY · Member since 2017 · 31 posts · 6 votes

Seeking some clarity.... If I have an AGI over $150K (lets say 39.6% tax bracket) and I own a rental property with figures as follows:

- Annual Rental Income: $40K

- Annual Operating Expenses/Mortgage Interest/Depreciation: $35K

- Annual Cash Flow: $7K

What do I owe taxes on? Do I have to pay IRS 39.6% of my $7K cash flow, OR the $5K difference between my total income & operating expenses?

Or something entirely different I've missed?

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Linda WeygantPro Member

Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes

Originally posted by @Chris Seveney:

Ned Gorges not sure how cash flow is $7k if expenses are $35k and rent is $40k, but it all depends on if you are using an llc and is it a pass through or is it in your personal name.

Nothing could be further from the truth. There is literally no difference on your tax return if you hold your properties personally vs in an LLC. The structure, and even the forms used, are exactly the same. There is nothing that an LLC gets you from a tax standpoint that you don't get when you hold the properties personally.

Holding property in an LLC is purely an asset protection plan, not a tax structure plan.

It's possible to have a difference between cash flow and profit when you factor in Capital Expenditures and Mortgage Principal paydown (which affect cash flow, but not profits) and Depreciation (which affects profits, but not cash flow)

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Christopher Smith
Investor · brentwood, CA · Member since 2016 · 1k+ posts · 730 votes
9y
the 5k amount,
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Chris SeveneyBusiness Member
Moderator
Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
9y
Ned Gorges not sure how cash flow is $7k if expenses are $35k and rent is $40k, but it all depends on if you are using an llc and is it a pass through or is it in your personal name. It also depends on how much above the $150k you are as deductions start to phase out above certain limits. This is not a simple answer and only one your accountant can answer as they need to see your complete financials.
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Brandon Hall
CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
9y
@Chris Seveney he included depreciation in his operating costs. Still doesn't make sense but I'm considering it as just an example.
@Account Closed you pay taxes on your taxable income. So if your gross rental income is $40,000 and you expenses (including depreciation an amortization) is $35,000, then your taxable income is $5,000. Thus, you pay taxes on the $5,000.
Generally, your taxable income and cash flow will vary greatly. I'm surprised they are so close together.
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Linda WeygantPro Member
Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
9y
Originally posted by @Chris Seveney:

Ned Gorges not sure how cash flow is $7k if expenses are $35k and rent is $40k, but it all depends on if you are using an llc and is it a pass through or is it in your personal name.
Nothing could be further from the truth. There is literally no difference on your tax return if you hold your properties personally vs in an LLC. The structure, and even the forms used, are exactly the same. There is nothing that an LLC gets you from a tax standpoint that you don't get when you hold the properties personally.
Holding property in an LLC is purely an asset protection plan, not a tax structure plan.
It's possible to have a difference between cash flow and profit when you factor in Capital Expenditures and Mortgage Principal paydown (which affect cash flow, but not profits) and Depreciation (which affects profits, but not cash flow)
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Chris SeveneyBusiness Member
Moderator
Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
9y
Linda
I have heard of some LLC's that are also high earners filing corporate tax returns for their LLC, while not common I believe it does happen.
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Jason Cox
Investor · St. Louis, MO · Member since 2017 · 4 posts · 0 votes
9y
I'm a new investor with a high AGI. Went to my CPA this week to find out that all of the depreciation and deductions are phased out at my income. Im not sure what income level that starts at. So just a warning, to check with your CPA about depreciation. She said if I have losses they can be carried forward but not to offset my employment income. I did read that you should never do a deal of it only makes sense with the tax benefit... I think that was Cash Flow Quadrant.
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Paul Allen
Financial Advisor · Virginia Beach, VA · Member since 2017 · 502 posts · 508 votes
9y
Originally posted by @Jason Cox:
I'm a new investor with a high AGI. Went to my CPA this week to find out that all of the depreciation and deductions are phased out at my income. Im not sure what income level that starts at. So just a warning, to check with your CPA about depreciation. She said if I have losses they can be carried forward but not to offset my employment income. I did read that you should never do a deal of it only makes sense with the tax benefit... I think that was Cash Flow Quadrant.
To be technical, the deductions are not phased out. The passive losses are 'suspended'. You carry them forward until you can claim them against passive income, your AGI is low enough to claim them against active income, or when you sell the property.
Welcome to REI - best of luck on your journey!
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Justin Fox
Software Developer · Vidor, TX · Member since 2015 · 922 posts · 639 votes
9y
@Paul Allen
@Jason Cox
@Brandon Hall
I though it was if your MAGI (AGI with rentals losses, passive losses or passive income added back) is above 100,000 that passive activity losses starts to phase out and above 150,000 it's completely gone.
1 Reply
Paul Allen
Financial Advisor · Virginia Beach, VA · Member since 2017 · 502 posts · 508 votes
9y
@Justin Fox that is the range when suspension of passive losses from real estate (with active participation) are phased in. A seemingly subtle difference that makes no real difference to your wallet in the year the passive losses are suspended. Nonetheless, it is an important distinction.
The actual difference to your wallet is that suspended passive losses can be carried forward. When a deduction is phased out, it's gone forever. If you earn too much to deduct student loan interest or your IRA contribution you lose the deduction. When passive losses are suspended you can carry them forward and take them in a future year as mentioned above.
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Account Closed
OP
Rochester, NY · Member since 2017 · 31 posts · 6 votes
9y
@Brandon Hall @Linda Weygant @Paul Allen
Brandon, just to confirm then....you think that even though my 9 to 5 job puts me over 150K AGI (and i'm not going to try and claim myself a RE pro with over 750 hrs etc...) I could still use the standard RE deductions on my annual tax filing so that i'm paying taxes on "taxable income" rather than cash flow?
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Paul Allen
Financial Advisor · Virginia Beach, VA · Member since 2017 · 502 posts · 508 votes
9y
@Account Closed if your federal tax return is correctly filed you will be claiming all the deductions for which you qualify to arrive at the correct taxable income.
There is no federal cash flow tax, so I am not sure what you mean when you ask about being taxed on cash flow.
It may be worth your time and money to have a consultation with a tax professional familiar with real estate to ensure you are correctly apprehending and applying the concepts involved.
Good luck with your real estate investments!
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Ralph R.
Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
9y
Paul Allen Is it not also true that when you sell the property you must pay recapture on the depreciation regardless of whether or not you actually were able to take the deduction? Also does a 1031 exchange exempt you from paying recapture on depreciation? RR
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Joe J.
Investor · Los Angeles, CA · Member since 2017 · 95 posts · 52 votes
9y
I also just wanted to add my input (complaint) that the $150k passive loss limit (where phasing out begins at $100k) is the same limit whether you or a single filer or joint filer.
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Linda WeygantPro Member
Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
9y
Originally posted by @Account Closed:

@Brandon Hall @Linda Weygant @Paul Allen
Brandon, just to confirm then....you think that even though my 9 to 5 job puts me over 150K AGI (and i'm not going to try and claim myself a RE pro with over 750 hrs etc...) I could still use the standard RE deductions on my annual tax filing so that i'm paying taxes on "taxable income" rather than cash flow?
Yes, you can use the deductions everybody else can take. For example, let's say your Gross Rents are $24,000 per year. Your regular deductible expenses are $20,000 per year and your depreciation is $5,000 making it a net loss of $1000 per year.
If your AGI is over $150K, then you still report that $1000 loss, but you don't actually get to deduct it. It accumulates until you sell or your AGI dips below $150K.
However, let's say your depreciation is only $1,000, making a net profit for the year of $3,000. Then regardless of your other AGI, you include that $3000 in your income and pay tax on it.
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Paul Allen
Financial Advisor · Virginia Beach, VA · Member since 2017 · 502 posts · 508 votes
9y
@Ralph R. Essentially true, although you are always able to take the deduction. Realizing the passive losses may be suspended until the year you sell the property, but since the unrecaptured section 1250 gain is also paid in the year you sell the property, it works out.
2 Reply
Ralph R.
Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
9y
@Paul Allen thanks!
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OP
Rochester, NY · Member since 2017 · 31 posts · 6 votes
9y
@Linda Weygant thanks so much, that's what i was after! now i just need to figure out how to qualify as an RE pro so i can apply the loss to my overall income.....
You qualify as a real estate professional for the tax year if you meet both of the following requirements.
- More than half of the personal services you perform in all trades or businesses during the tax year are performed in real property trades or businesses in which you materially participate.
- You perform more than 750 hours of services during the tax year in real property trades or businesses in which you materially participate.
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Justin Fox
Software Developer · Vidor, TX · Member since 2015 · 922 posts · 639 votes
9y
@Account Closed
My wife only does RE stuff now (building rentals and buying property) so we'll qualify this year. Which will also allow us to take the home office deduction and deduct miles that are typically classified as 'commuting'.
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Linda WeygantPro Member
Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
9y
Originally posted by @Justin Fox:

@Account Closed
My wife only does RE stuff now (building rentals and buying property) so we'll qualify this year. Which will also allow us to take the home office deduction and deduct miles that are typically classified as 'commuting'.
Your wife must also work a minimum of 750 hours in real estate. It's not just that she ONLY does Real Estate (which is a great first step towards qualifying), but she does have to have the minimum number of annual hours as well.
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Linda WeygantPro Member
Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
9y
Originally posted by @Account Closed:
@Linda Weygant thanks so much, that's what i was after! now i just need to figure out how to qualify as an RE pro so i can apply the loss to my overall income.....
You qualify as a real estate professional for the tax year if you meet both of the following requirements.

More than half of the personal services you perform in all trades or businesses during the tax year are performed in real property trades or businesses in which you materially participate.
You perform more than 750 hours of services during the tax year in real property trades or businesses in which you materially participate.
This is REALLY hard to do if you work a full time W-2 job. If you work a standard 40 hour week at your job, that's 2080 hours per year. You must then work 2081 hours in real estate in order to qualify as a RE Professional.
Also, bear in mind that 750 hours per year might now seem like much, but it is 15 hours per week. I have 12 rentals and while there are certainly some weeks that I meet that 15 hour threshhold, unless I've really screwed something up and I have a TON of vacancies or repairs, I'm not going to meet that 15 hour/week threshold week over week, each and every week.
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Justin Fox
Software Developer · Vidor, TX · Member since 2015 · 922 posts · 639 votes
9y
@Linda Weygant
Building a house is pretty involved. Inspecting work, buying lack of supplies, calling vendors, painting (interior and exterior), floors, counter tops and landscaping hours add up. Tack on the repair here and there, collecting rent and the time required to track and log everything electronically. She meets it the hours requirement easy.
Can you meet the status requirements one year and not the next?
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Stacie T.
Real Estate Agent · Dallas/Fort Worth · Member since 2016 · 25 posts · 11 votes
9y
Originally posted by @Linda Weygant:

Originally posted by @Chris Seveney:
Ned Gorges not sure how cash flow is $7k if expenses are $35k and rent is $40k, but it all depends on if you are using an llc and is it a pass through or is it in your personal name.
Nothing could be further from the truth. There is literally no difference on your tax return if you hold your properties personally vs in an LLC. The structure, and even the forms used, are exactly the same. There is nothing that an LLC gets you from a tax standpoint that you don't get when you hold the properties personally.
Holding property in an LLC is purely an asset protection plan, not a tax structure plan.
It's possible to have a difference between cash flow and profit when you factor in Capital Expenditures and Mortgage Principal paydown (which affect cash flow, but not profits) and Depreciation (which affects profits, but not cash flow)
Thank you Linda. I'm confused about how a person who has an AGI in excess of $150K benefits on taxes by rental properties. I've read many things stating that depreciation is not allowed if one has an AGI over $150K. Is this true?
0 Reply
Account Closed
OP
Rochester, NY · Member since 2017 · 31 posts · 6 votes
9y
@Stacie T. what I've learned is that you CAN depreciate the asset in order to offset your total rental income you need to report. But what you cannot do is use to offset all your other income from your 9 to 5 day job.
1 Reply
Stacie T.
Real Estate Agent · Dallas/Fort Worth · Member since 2016 · 25 posts · 11 votes
9y
Originally posted by @Account Closed:

@Stacie T. what I've learned is that you CAN depreciate the asset in order to offset your total rental income you need to report. But what you cannot do is use to offset all your other income from your 9 to 5 day job.
Thank you Ned!!!! Can the depreciation loss from one LLC offset a gain of another LLC I own? I wonder.... I know, now I am getting demanding....
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Account Closed
OP
Rochester, NY · Member since 2017 · 31 posts · 6 votes
9y
@Stacie T. I'd be curious to hear from Linda on that one....i'm not as sure about LLC implications. I'm 99% sure though that if for example I owned 3 rental properties (without an LLC on any), that the IRS considers all of that to be "passive income" and so yes, i could use losses from 1 of them in order to offset the other 2...basically they can all be reported together. I think that's right, not sure about LLC stuff though and would love to hear Linda's thoughts cause she certainly would know better than I on all this.
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