Depreciation Owner Occupied Vs. Rental Am I On the Right Path

OP

Investor · Austin · Member since 2018 · 51 posts · 22 votes

7y

@Mark Anderson I am currently looking into buying a rental property. However I will pursue the deal that makes the most sense and wanted to confirm I am on the right track in regards to my understanding of tax write offs. I plan on working with an accountant once I have purchased a property but wanted to get an overall understanding of the tax writes off before purchasing a property. Owner occupied residence qIadplex and below my understanding -you have to occupy the unIt withIn 60 fays of purchasing It for It to be owner occupied -you can write off the interest and property tax to lower your overall income to a lower tax bracket. -any income from the rental over the interest and property tax would be considered ordinary income -you are able to to write off the depreciation of the real estate property over 27.5 years for the units you are renting and maybe the one you occupy as well. As long as your income is less than 150k -you can also itemize the depreciation of the flooring, appliances etc. for those unIts yoI do not occupy over a shorter period of time than 27.5 years -you can write off the cost of improvements to the units in which you do not occupy NOT Occupied Rental Property --you can write off the interest and property tax to lower your overall income to a lower tax bracket. -any income from the rental over the interest and property tax would be considered ordinary income -you are able to to write off the depreciation of the real estate property over 27.5 years for the units you are renting and maybe the one you occupy as well. As long as your income is less than 150k -for example if you make 50k at work and 50 k from rental income 100k gross earnings from the year you could subtract 1/27.5 years of depreciation let’s call it 50k and 30k of interest and tax so your tax able income would be 100k-80k=20k taxable income -how would being a real estate professional help me making under 150k Would appreciate any help or resources you could refer me to

0 Reply

Natalie KolodijBusiness Member

Moderator

Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes

7y

I think you're mixing up several comcepts.

Part 1:

You owner occupy 1 unit of 4. Assuming all 4 units are the same size....then you get to depreciate 75% of the building value over 27.5 years.

Any improvements done to those rental units (depending on safe harbor and tangible property regs- but lets assume big items that require capitalization) are depreciated 100% at 27.5 years.

Any improvements that impact all 4 units (IE a roof ) you would depreciate 75% of that over 27.5 years.

Any improvements to your personal unit = NO depreciation. They just count toward your basis, and can reduce any gain when you sell.

Part 2:

Mortgage Interest and Real Estate Taxes

75% will be deducted against rental income on Sch E

25% will be deducted as itemized deductions on your Scheduel A (If your itemized deductions are above the $24k required for 2018 to be able to itemize) If your itemized deductions are below $24k- you get the $24k standard deduction instead and nothing happens with that 25% of the interest/re taxes.

Part 3:

The $150k rule you're referencing is the small taxpayer allowance to deduct passive loses.

This is unrelated to taking depreciation, or deductions ect.

All this means is that IF your AGI is under $150k AND your rental generates a loss on Sch E AFTER accounting for depreciation, expenses, ect....

Then

That loss will be allowed to offset your earned income.

That begins to phase out at $100k. And once your AGI is over $150k then that loss can't be used. And just carries forward to a year in which you have passive income to use it against, or when your income is back below that threshold.

Hope this helps!

Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies

Kolodij Tax & Consulting

Website View Page

4 Reply

Ashish AcharyaBusiness Member

CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes

7y

Hope this helps. You covered various topics which need in-depth discussion to understand. Feel free to reach out and I can explain over the phone.

you have to occupy the unIt withIn 60 fays of purchasing It for It to be owner occupied -you can write off the interest and property tax to lower your overall income to a lower tax bracket.

Answer - From tax side, there is no time requirement on after how many days you have to occupy. Your lender might have that requiremt for your mortgage.

any income from the rental over the interest and property tax would be considered ordinary income

Answer- passive income taxed at ordinary rate. It is not ordinary income. This is imp distinction if you have both passive loss and income.

-you are able to to write off the depreciation of the real estate property over 27.5 years for the units you are renting and maybe the one you occupy as well.

Answer- not for the one you occupy. You can’t depreciate your personal property. Your occupied unit is personal asset. If you move out, you can depreciate it.

As long as your income is less than 150k -you can also itemize the depreciation of the flooring, appliances etc. for those unIts yoI do not occupy over a shorter period of time than 27.5 years

Answer -This whole sentence is not correct. Itemize deduction has nothing to do with depreciation or your rental activity. Also, 150 k income is a threshold to determine if you could deduct rental loss up to 25k. The 150k has nothing to do with what you are saying.

For shorter depreciation period, you would have to allocate purchase price to the various properties via cost segregation. You need to do a cost benefit analysis. You might have huge loss via the shorter depreciation that might be limited and might not be worth it.

-you can write off the cost of improvements to the units in which you do not occupy NOT Occupied Rental Property

- Improvement can never be written off unless it meets some safe harbors( such as less than 2500). Improvements are depreciated. Repairs are written off. You might need to research more on what are improvements vs repairs.

for example if you make 50k at work and 50 k from rental income 100k gross earnings from the year you could subtract 1/27.5 years of depreciation let’s call it 50k and 30k of interest and tax so your tax able income would be 100k-80k=20k taxable income.

- that’s not how it work. You need to separate two activities.

Your net rental loss will be 30k( 50k -80k) . There’s is a limitation on the rental loss. That 150k I was talking about above, you can deduct only 25k of loss, if your AGI is below 100k( here yours is), and your deduction will phase out if your AGI is more than 150k. You can’t deduct entire 30k unless you are Re pro. See below.

how would being a real estate professional help me making under 150k -

Answer- If you are RE pro, you can deduct all the rental loss if you materially participate in your rental. But if you make less than 150k, and your rental loss is below 25k, there is minimum benefit from being a RE pro.

[email protected]941-914-7779

INVESTOR FRIENDLY CPA®5241 Reviews

Website View Page

TaxMD® | Tax Planning Software

Website View Page

3 Reply

Marina Draper

Accountant · We serve all 50 states · Member since 2015 · 90 posts · 51 votes

7y

Great answers above! I would just add that on top of interest, depreciation and repairs/maintenance there are many other things you can deduct, depending on your situation - things like home office, car/transportation expenses, travel, meals, books/education and many more. I highly recommend to hire a knowledgeable and proactive accountant who will help you take the most benefit out of the tax regulations.

1 Reply

Michael PlaksPro Member

Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes

7y

@Mark Anderson

I think you're risking to drown yourself in technical details before understanding the big picture. I will try to paint that big picture.

1. For tax purposes, you're buying two properties, not one. One is personal (1 unit), and the other is rental (3 units). All costs are allocated 25% / 75% between these two properties.

2. Costs allocated to the personal unit are not deductible, most likely - unless you have a lot of personal itemized deductions. So you will not get any tax benefit for 1/4 of mortgage interest, 1/4 of property taxes, 1/4 of insurance. 1/4 of utilities etc.

3. Costs allocated to the rental units will go against your rental income. If you collected $20,000 rent from the 3 units, and the 3/4 of your mortgage interest, taxes, insurance, repairs and whatnot are also $20,000 - then you have zero taxable income form renting. (Zero cash flow, too)

4. If your rental income is $20,000 and your allocated expenses are $15,000 - then you have $5,000 cash flow that should also be taxable income.

5. However, you can also subtract depreciation, which can kill this $5,000 taxable income and reduce it to zero. You are always allowed to reduce your taxable income to zero.

6. The next question is whether you can reduce it below zero - i.e. generate a tax loss which can be used against your other income, such as from a W2 job. This is where it gets complicated. If your income is under $100k - then you can create a tax loss of up to $25,000. If your income is between $100k and $150k - then the window for the $25k loss gets slowly squeezed out until completely shut at $150k and above. At this point, you can only have deductible losses if you qualify as a RE Pro - which is very difficult to qualify for. Impossible if you have a full-time job.

7. If you do have room for losses - then you may want to play some games trying to maximize the losses. One of those games is to dial up your depreciation by breaking out certain components like appliances, carpets, concrete etc. It is known as cost segregation or asset segregation.

8. If your losses are locked up by high income - then there is no point trying to increase them. All locked up ("suspended") losses are pushed into the future years and will eventually be unlocked when you sell.

2 Reply

Mark Anderson

OP

Investor · Austin · Member since 2018 · 51 posts · 22 votes

7y

@Natalie Kolodij Yes this helps a lot. Great job and explanation for this.

1 Reply

Depreciation Owner Occupied Vs. Rental Am I On the Right Path

Depreciation Owner Occupied Vs. Rental Am I On the Right Path

Most Popular Reply

6 Replies