$100k rental income vs $100k earned income taxes?!

19 Replies

@Edmondo Morgan Jr

The key with rental income is depreciation. It allows you to have real cash in the bank from your rental income, but a lesser amount or even losses on paper for tax purposes. Plus, you can deduct most common expenses related to owning and operating the property as a rental.

If you haven’t already, you want to read “Tax Free Wealth” by Tom Wheelwright.

Get yourself a good CPA.  They should be able to run through all those things with you.  There are many tax advantages to having rental properties.  If you or your accountant are doing it right you should be paying a lot less in taxes.  There are many things you can deduct.  You might checkout some local real estate meetups in your area.  Near me there are several this month with a CPA going over taxes and how to best position yourself.

@Edmondo Morgan Jr

Right off the bat you don’t pay social security and medicare taxes- a savings of 7.5% for employees  or 15% if you own your own business or are a 1099 contractor. 

The deductions, as others suggest, may save you more. However, Rental income does not qualify as earned income for Ira and 401k contributions so you lose those deductions.  

It's compounded benefits. 

The big one is no payroll taxes- so if you were self employed vs. owning rentals you're already saving 15% direct off the top in taxes. 

Or if you're looking to replace your take home wages with rental income you need to take home 7% less because you're not paying that tax on it. 

The other benefit is depreciation- it's a deduction you get to take, without any cash outflow. 

So ideally at the end of the year your bank account for your rental has $5k sitting in it, but say your depreciation is $5k...now you pay $0 in taxes on that $5k. 

Now imagine you have 10 rentals that are making you $5k annually. 

At the end of the year you made $50k and pay $0. 

If you made $50k at a job your take home would be reduced by income and payroll taxes so you'd really have to earn substantially more, to take home the same $50k. 

@Edmondo Morgan Jr

Another tax free benefit from rentals is taking cash out of the equity. For example, I did a cash out refi on a property last summer. I got 140k cash back to do whatever I want with. And I don’t have to pay a cent of tax on that 140k deposited in my bank account. When I’m retired, I plan on doing this occasionally. If I need 100-200k cash tax free occasionally, I’ll just do a cash out refi and live off it.

Originally posted by @Natalie Kolodij :

It's compounded benefits. 

The big one is no payroll taxes- so if you were self employed vs. owning rentals you're already saving 15% direct off the top in taxes. 

Or if you're looking to replace your take home wages with rental income you need to take home 7% less because you're not paying that tax on it. 

The other benefit is depreciation- it's a deduction you get to take, without any cash outflow. 

So ideally at the end of the year your bank account for your rental has $5k sitting in it, but say your depreciation is $5k...now you pay $0 in taxes on that $5k. 

Now imagine you have 10 rentals that are making you $5k annually. 

At the end of the year you made $50k and pay $0. 

If you made $50k at a job your take home would be reduced by income and payroll taxes so you'd really have to earn substantially more, to take home the same $50k. 

Beautifully explained...thank you!! Tons of tax benefits!

Originally posted by @John Morgan :

@Edmondo Morgan Jr

Another tax free benefit from rentals is taking cash out of the equity. For example, I did a cash out refi on a property last summer. I got 140k cash back to do whatever I want with. And I don’t have to pay a cent of tax on that 140k deposited in my bank account. When I’m retired, I plan on doing this occasionally. If I need 100-200k cash tax free occasionally, I’ll just do a cash out refi and live off it. 

Keep in mind that refi proceeds are NOT tax free they are just tax differed you base gain on basis and refi does not add to basis. Along with depreciation unless you stay in the rentals for ever and then just let them be inherited you have to 1031 for the rest of your life or keep them the rest of your life.. or if you sell you have to recapture all that deprecation.. so while it has benefits today its not tax free money unless again you keep them forever give to kiddos and they receive the stepped up basis.. that's my understanding  anyway.

Originally posted by @Dennis M. :

Mileage is a big one ! You can write off your miles of your truck ..which is great for guys like me ,whom own properties an hour away 

plus if you buy the right vehicle you can write off 100% year one  but of course you have that ole recapture when you sell.. so one needs to be mindful of that. 

Originally posted by @Shadonna N. :

@Jay Hinrichs What if you donate the vehicle?

good question  depreciate it all out and then donate it.. and not pay recapture.. maybe a CPA can Opine I don't know. I have donated houses to charity but I did not depreciate them.. so not sure.

Originally posted by @Shadonna N. :


@Jay Hinrichs now there's a thread!  You donated a house to charity?  What kind a write-off on that.  We don't want to hi-jack this thread but can you share?  

I have donated many over the years.. I actually donated one to a BP member as an exercise .. and give back to BP that has been so good to me.. Also see my charity below we are donating a really nice remolded house to a veteran in a few short months your free to make a donation so you will also be giving a home away.

Originally posted by @Dennis M. :

Mileage is a big one ! You can write off your miles of your truck ..which is great for guys like me ,whom own properties an hour away

 Important to note you need a home office to deduct your miles from your home to your rental. 

Other wise the IRS looks at it like commuting, which isn't deductable. 

Same as a regular person going from home to work. 

If you don't qualify for home office make your home depot stop, or post office for rental document stop as close to home as possible. 

Your home to a business Location= not deductible 

Business related to business related= is deductible 

If you have a business location in your home (home office) - it converts home to business as deductible as well.

@Edmondo Morgan Jr

IF you qualify as a real estate professional AND you pass the 500 hour test for managing rental property you can offset other income—including a spouses if you are filing jointly.

And current tax law allows for 100% bonus depreciation in year one of service. That combined with a cost seg—goodness. Recapture still a thing though.

Not an accountant or tax professional, and not advice.

@Jay Hinrichs I think the recapture issue is a big one. I can’t even remember how many people

I have talked to who think depreciation gives them ‘tax free income’.