What do you actually end up paying in taxes?

Question

Hi All,

I am under contract on my 3rd acquisition in 2018, so I have yet to actually file a tax return with rental income on it. Is there a general rule of thumb for how much you actually pay in rental income tax after all the deductions? Say your property shows a $5,000 annual profit on paper, once you consider the write-offs like depreciation, mortgage interest, property tax, etc, what kind of tax bill should you expect?

Especially curious because I aspire to one day live off of rental income, so I'd like to get an idea of how much of the profits you actually take home at the end of the year.

Derek Luttrell · Answer

@Ashish Acharya that is helpful, thank you. My AGI is above $100k, but I'm not too concerned with taxes while working my W2 job. My main concern is preparing for a life of living off of rental income, which hopefully is within the next 7-10 years. I want to make sure I'm allocating enough of the profits to taxes.

Account Closed say how landlords are among the most advantageously taxed individuals, so I'm looking forward to seeing that firsthand when I file next year. I may just have to "learn as I go," because it's difficult to picture right now.

Ashish Acharya · Answer

@Derek Luttrell ,

sorry if I am going down to basic. You get taxed at the NET taxable rental income.

Rents

( actual expenses)

= Net Income  - this is your cash flow.

= (depreciation)

Net taxable income

If you qualify for New 20% passthrough deduction, you only get taxed at 805 of your Net taxable income.

First few years, depreciation will eat most of your income so you might have very little to actual tax savings from the rentals.

If you dont have a w-2 job, your rental income determines your income tax bracket. Rental income is just another form of income, you dont need a W-2 job to fall under an income tax bracket.

Meaning, very simply,  a person with a 50k W-2 job or 50k rental income are taxed at the same bracket.

If you have a W-2 job,

1) you rental income gets added to your income and gets taxed at your marginal rate

2) if you have a loss, and your AGI is below 100k, you will get to deduct loss up to 25k against the W-2 income ( this is where the tax saying comes in).

If you want to retire with RE, you might not pay any taxes if you structure your deals correctly and plan correctly to qualify for RE professional( RE pro dont have a limitation of passive loss ) .

This might be too much info for one post. You will eventually learn here.

Let me know if that makes sense.

Carl Fischer · Answer

@Derek Luttrell

The tax on the rental property is dependent on how much you make. The best thing about rental income is it is “passive” according to IRS. Thus no SS/Med saving 7.5 or 15% on income.

Caleb Heimsoth · Answer

@Derek Luttrell it pays to be well versed on this stuff.  I found a mistake my cpa made last year related to REI (it was a simple one but it happens)

This year I found a tax break I’m pretty sure I can use in the future that I would guarantee you he hasn’t heard of.

If you own property in multiple states like I do and will add to that in the future then it pays to know the local laws

Derek Luttrell · Answer

@Carl Fischer do you live off of your rental income completely, or do you pay about 40% because that is your personal tax rate from some other job? If rental profits are taxed at your personal income tax bracket, but you don't have a job outside of your rental income, how do those people get taxed?

@Caleb Heimsoth great suggestion on the book. The more FIRE blogs I read, the more I realize that the majority of them are well-versed in tax tricks that allow them to minimize their tax burden to next to nothing.

Account Closed · Answer

@Derek Luttrell Good question.

If looking at just net rental income you should not expect an increase in your tax bill as depreciation will drive you into a loss that will either be:

1. Suspended and carried forward (leaving you with 0 taxable rental income regardless of cash received) or 2. Applied against active income if you fall under the MAGI thresholds.

Basically, depreciation shields (defers) your rental income so the rental income is not taxed in the current year.

Michael Plaks · Answer

Maybe you need an upgrade then

Carl Fischer · Answer

@Derek Luttrell

It depends on how much you make. Generally for me it keeps going up. Starting out I got breaks and paid less tax. Now I pay approximately 40% after 35 years. The answer is specific to your situation. Ask your cpa for an accurate number and do it every year. It will help you understand tax law and changes etc. Obama’s care made it worse but trump taxes I think may be making it a little better.

What do you actually end up paying in taxes?

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