Tax advantage for property purchase

4 Replies

How do you figure out how much money you’ll save on your taxes by purchasing an investment property? Or how do you calculate tax advantage?

Say (very hypothetically😂) I had an income of 400,000 and I bought a $100,000 house with 25% down. What would my tax savings be from a purchase like this?

Maybe this is too broad and too many factors involved. Just wondering if there’s a calculator to help calculate tax advantages.

Thanks for humoring a newbie!

Property expenses and depreciation can be used against the rental income.  (depreciation is spread over 27.5 years if residential property)  If there are losses then it will not reduce your other income unless you make less than $150,00.  Look up passive income rules, if interested

@Brianna Babienco , welcome to the REI journey.

Besides tax advantages, there is a high return via the real estate appreciation (both longterm and short-term).  That is always a good thing. When I think about it, someone else is making you rich by making your mortgages payments too. 

Strictly speaking from the tax perspective: 

1) With depreciation (phantom expenses), you will always have more cash flow than actual Income that you show on your return. Sometimes you have cashflow even when you have a loss from the tax perspective. 

1) If you didn't have $400k of income, you could deduct 25k of a passive rental loss against your W-2 ( ordinary income)  limited to phase out starting 100k. 

2) if you are such a high earner, you can offset the passive loss that you generate via rental properties to the other passive income  ( investment in the partnership as a limited investor or any other business where you materially do not participate). High earner should generally invest 85% in the safe market and 15% of the aggressive market ( start-ups).  

3) If you have rentals and are such a high earner, you can hire your children so that they don't have to pay taxes on some of your income ( limited to standard deduction) or pay them more than the standard deduction and they still pay fewer taxes.  

4) You can time the disposition of the rental property right so that when you have very high income in a year, you can dispose the rental property and use all the suspended passive loss that you were not allowed to take because of your high earnings in the prior year ( this loss can be substantial)  

5) if you plan it right, you can convert some of the personal purchases to rental expenses ( lawn mowers, Ipads, laptops  you get it)

6) some of the vacation travel might be planned right to make it a business trip and get tax deductions.

There are much more.. so get started :)  

@Ashish Acharya

Thanks for the insight!  We are moving into a new financial status in the next year, so the idea of having money to invest is new to us.  

I guess I shouldn't be vague.  lol!  Your post was SUPER helpful though! I appreciate you taking time to answer.   In a year our earning will be close to $400,000- but it feels like a long ways off!  However, we have $380,000 in student loan debt.  (!#&%*[email protected])

Trying to find the balance of aggressively paying off debt (4.25% for 7 year term) or possibly making a rental purchase before our debt is paid down.  If there would be a significant tax advantage I would rather pay the money into an investment than in taxes.  

@John Akolt I'll look up the passive income rules! Thanks! 

Originally posted by @Brianna Babienco :

Say (very hypothetically😂) I had an income of 400,000 and I bought a $100,000 house with 25% down. What would my tax savings be from a purchase like this?

Are you filing single, head of household, married filing jointly, or married filing separately? Does your state have an income tax? Is this house for your personal use or is it a rental property? Or is it your intention to fix and flip? What rate did you get on the $300,000 mortgage?  Did you pay points? What are your property taxes?

You don't get a write off of $100,000 just because you bought a property, but you may qualify for some tax advantages. Quantifying them is (as you can see) based on a lot of different factors. So many factors it makes knowing a human with knowledge very valuable. 

You should check out the Bigger Pockets Tax book. Tons of knowledge in there!

Best of Luck on your Real Estate Investing!