Rental income and expenses; IRS publication

3 Replies

Hi all,

I came across this IRS publication with detailed explanation on to how to treat expenses for your rental property. Including depreciation and including rental of vacation homes. 

Here is the link https://www.irs.gov/pub/irs-pdf/p527.pdf

I think every buy and hold investor should know it and this publication is a good guideline before you go to your accountant with numbers.  

This might as well have been written in alien code, and I have many degrees.  The IRS should be ABOLISHED. 

I have a single member LLC....my accountant tells me all my tax deductions are taken in depreciations. For example, I spent about 160 grand in real estate in 2017 and probably 40 grand improving it ( I have exact numbers in tenantcloud.com) I collect about 50 grand a year in rent on these properties after general expected annual expenses (NOI). To make math simple, I spent 200k this year. I make 50k a year on it. Can I assume in 4 years, for IRS purposes, I will "make my investment back," and in the fith year, the IRS sees that 50k as additional income? I do real estate investing on the side.

So if I make 400k in my day job, and 50k in real estate income in year five, will the IRS treat me as having 450k in income, and thus tax 450k at the marginal rate for my income bracket? 

Thanks!

Originally posted by @Paul Passafiume :

Can I assume in 4 years, for IRS purposes, I will "make my investment back," and in the fith year, the IRS sees that 50k as additional income?

No, that's not how it works. 

Your taxable income from rental activities is the revenue generated minus the expenses. One of your expenses each year will be depreciation. Your buildings and the improvements you made to them are depreciable assets. The Internal Revenue Code specifies the depreciation period for residential rental properties is 27.5 years. Therefore, the depreciation expense you can deduct on $200,000 of rental real estate is going to be about $7,273 ($200,000 / 27.5). You add that to your other expenses for the year (insurance, real estate taxes, mortgage interest, utilities, repairs, cleaning, etc.) to get your total expenses and then subtract your total expenses from your rental revenue to get your taxable income from real estate activities.

Best of Luck with Your Real Estate Investments!

I’d also recommend you check out publication 469 and absorb the passive activity rules.  I’ve found that most cpas don’t know this must know stuff either.  

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