Is rental income taxed the same as regular income?

Question

I am a new landlord renting out my first rental property.  Does the IRS consider rental income as regular income and tax accordingly (30%)?  Are there any special tax breaks or deductions?

Jeff Takle · Answer

I might be wrong here (I'm also a Realtor so I get the exception already) but if you are actively involved in the management of your properties, defined by some level of effort maybe 500 hours a year, then you too are exempt from the passive losses limit--essentially because they are not passive, they are from something in which you are actively engaged.

If you do your own property management, fix-it stuff, and finances, you are probably exempt from the $25,000 / yr limit.

The IRS website has a good page that walks you through your specific situation:  http://www.irs.gov/businesses/small/industries/article/0,,id=98881,00.html

:rock:

N/A N/A · Answer

Good point Takleberry,

I recently bought two rentals out of state. They are both leased for the year and provide a negative cash flow. The rent more than pays the mortgages but after calculating the down and repairs it will be negative for a while.  Anyway, last year I got nailed by AMT taxes.  This year, with the rentals, I lowered my tax base and was able to keep much more of my income. I have enough in reserves to cover any vacancies and plan to keep the rentals for the long term.

Frank Adams · Answer

Hmmmm, losses?

If you're consistently LOSING money, it's not an investment, it's a HOBBY?

all cash

Joe Wilson · Answer

DON'T GET CONFUSED WITH REAL ESTATE LOSSES GENERATED BY NON-CASH DEPRECIATION EXPENSE AND SEC. 183 HOBBY LOSS RULES.  REAL ESTATE PROVIDES LOSSES DUE MOSTLY TO DEPRECIATION EXPENSE AND PROVIDES A POSITIVE CASH FLOW, GENERALLY.  YOU DO NOT GET INTO HOBBY LOSS RULES WITH REAL ESTATE AND THERE ARE OTHER FACTORS FIGURED INTO THE HOBBY LOSS RULES AS WELL.

Jeff Takle · Answer

Obviously, the best properties are going to be ones that generate positive cash flow from day one, that cost you no money down, were grossly undervalued in the market, and which you found while nobody else was looking...But, while you quickly reach limits if you're experiencing negative cash flows in property, it may still be a very good idea to buy a property even if it's got negative cash flow.

I may be in the minority here, but...I've got other sources of cash which are positive cash flows and here's only so much you can do to reduce that taxable basis. But, I own property that has negative cash flows and posts as passive losses each year. If you can handle the negatives from a cash flow perspective, and it helps you to reduce your taxable basis from other incomes ($$$ benefit), and you are counting on long-term appreciation, I feel this is still a strong strategy. It certainly beats the crap out of working an additionl 40 hrs/week to gain overtime salary.

Maybe it's more like this-- it's better ROI to put your cash in a money market account than keep it under your mattress; but it's better to put it into an index fund than a money market; better still to select a prize-winning stock; better still to correctly pick hedge funds/explosive growth companies, etc., etc.  My way might not be the very best investment but still a heck of a lot better than sitting in a money market, and the IRR, ROI, cash on cash, GRM look solid.

Am I missing something or isn't this more a matter of your tastes and personal preferences? I see a lot of chatter that claim only the no money down, positive cash flow from day one, 70% LTV etc. are worth pursuing. I tend to think there is still a LOT of money to be made in the grey area between here and there. It's certainly worked out well for me, but then that might have more to do with an overall very strong market and the fact that a monkey could have picked properties that made money over the past five years???

Joe Wilson · Answer

And up to $25,000 of Real estate losses may be deducted for certain individuals.  This special exemption is limited to non-real estate professionals and persons with less than ~$125K income.  
Joe

N/A N/A · Answer

Rental income  is classified as passive income for tax purposes and is treated the same as any other form of business income except that it is not subject to self employment taxes which is a big break.  you are also entitled to depreciation on your property which also reduces your taxes. If you have any other questions, please feel free to contact me at any time, My  CPA firm specializes in working with people in the real estate business.

Stuart Mordfin CPA
smordfin@mordfin.com
www.mordfin.com
516-829-9088

Jason Barnett · Answer

If you are a sole proprietor then it is fairly simple to treat it as normal income.  If you keep receipts for all business expenses then you can claim those again income (things like cell phone, office space in your house, repairs and more are all possibilities).

If you're not a sole proprietor then you are probably better off just hiring a tax accountant to do it for you.   I will likely have my CPA completed by the time tax time rolls around so drop me a line if you're interested. :superman:

Is rental income taxed the same as regular income?

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