Income taxes on rental properties

Minneapolis, MN · Member since 2018 · 12 posts · 0 votes

How much of your profits are eaten up by income taxes on rent paid each year?? I know you get deductions for depreciation, and maintenance but even after that, it seems like any profits would be eaten up and possibly make for negative cash flow. PLEASE HELP SQUASH THIS QUALM!!! I REALLY WANT TO INVEST!

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Basit SiddiqiBusiness Member

Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes

@Joe Einbinder

You should have the tax return prepared by this accountant reviewed by another accountant.

[email protected]917-280-8544

Basit Siddiqi CPA4.979 Reviews

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Jaysen Medhurst
Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
6y
I'm not following your thinking here, @Joe Einbinder. Depreciation aside, if I net $1k in cash flow and I'm in the 24% tax bracket, I walk away with $760. How would income taxes make your cash flow go negative?
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Joe Einbinder
OP
Minneapolis, MN · Member since 2018 · 12 posts · 0 votes
6y
@Jaysen Medhurst sorry I should’ve given more context. I’m looking at properties in an expensive area that may only cash flow $300 or so. With how much I would pay in income taxes (in same bracket as you) it seems like the taxes would eat up all of that cash flow!
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Kyle J.
Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
6y
@Joe Einbinder It shouldn't matter if you're in an expensive area or an inexpensive area. Either way, you shouldn't pay more in taxes than you're making.

Here's some quick info that might help clarify how rental income is taxed: Real Estate 101: How Rental Properties Are Taxed

It probably also wouldn't hurt to sit down with your tax professional and have him/her give you some expert advice specific to your unique tax situation.
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Terrell Garren
Rental Property Investor · Concord, NC · Member since 2016 · 1k+ posts · 3k+ votes
6y
I am all for tax avoidance; however, if you are paying income tax, you are making money.
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Jaysen Medhurst
Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
6y
Well, @Joe Einbinder, it's a bit more complicated, because...accounting.
But if you're making $300 in cash flow, you're walking with $228 after taxes. Of course, one upside of a HCOL area is you'll get much more depreciation and will likely offset all of your income.
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Joe Einbinder
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Minneapolis, MN · Member since 2018 · 12 posts · 0 votes
6y
@Jaysen Medhurst wouldnt you get taxed on the overall rent paid? Not just the profit?
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Sylvia B.
Rental Property Investor · Douglas County, MO · Member since 2014 · 1k+ posts · 1k+ votes
6y
Originally posted by @Joe Einbinder:
@Jaysen Medhurst wouldnt you get taxed on the overall rent paid? Not just the profit?

No. No business pays tax on gross sales.
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Joe Einbinder
OP
Minneapolis, MN · Member since 2018 · 12 posts · 0 votes
6y
@Sylvia B. Well now we get down to my confusion! So I have a 1 bed condo that I rent out and last year was the first year I’ve collected rent. My accountant asked for only the full amount of rent that was paid to me, and specifically told me not to give her the profit... I pay HOAs, she didn’t want that either...
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Kyle J.
Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
6y
Originally posted by @Joe Einbinder:
@Sylvia B. Well now we get down to my confusion! So I have a 1 bed condo that I rent out and last year was the first year I’ve collected rent. My accountant asked for only the full amount of rent that was paid to me, and specifically told me not to give her the profit... I pay HOAs, she didn’t want that either...

Your accountant would need to know the full amount of the rent you collected, so that sounds proper. However, you should also have provided her with any rental-related expenses you incurred. Things like repairs, property insurance, property taxes, HOA dues, utilities, mortgage insurance, etc.

If you didn’t already, you should read the article I linked to in my previous post above. It might help explain all of this for you a little more thoroughly.
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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
6y
@Joe Einbinder

You should have the tax return prepared by this accountant reviewed by another accountant.
[email protected]917-280-8544
Basit Siddiqi CPA4.979 Reviews
View Page
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Sylvia B.
Rental Property Investor · Douglas County, MO · Member since 2014 · 1k+ posts · 1k+ votes
6y
Originally posted by @Joe Einbinder:
@Sylvia B. Well now we get down to my confusion! So I have a 1 bed condo that I rent out and last year was the first year I’ve collected rent. My accountant asked for only the full amount of rent that was paid to me, and specifically told me not to give her the profit... I pay HOAs, she didn’t want that either...

Kyle and Basit are correct. I would get a new accountant.
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Theresa HarrisPro Member
Member since 2019 · 15k+ posts · 11k+ votes
6y
Originally posted by @Joe Einbinder:
@Sylvia B. Well now we get down to my confusion! So I have a 1 bed condo that I rent out and last year was the first year I’ve collected rent. My accountant asked for only the full amount of rent that was paid to me, and specifically told me not to give her the profit... I pay HOAs, she didn’t want that either...

Your accountant doesn't know what she is doing. You need to give her all of the expenses (HOA, property taxes, insurance, interest on the mortgage, any utilities you pay, etc).
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Jaysen Medhurst
Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
6y
No, @Joe Einbinder, that's not how taxes work. Just pay on the profit. I too vote for a new accountant.
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Joe SplitrockPro Member
Moderator
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
6y
@Joe Einbinder your accountant is right that what you are calling profit is not important. For tax purposes, cash flow is not profit. Your mortgage payment is not a business expense. Only the interest, taxes and insurance portion of your payment is a business expense. You can also claim depreciation, HOA and other normal business expenses. If the property was purchased with a low down payment, there is likely large interest expense. That combined with depreciation will usually offset most of your income (rents). Very often you end up with a tax loss, even though you may have a cash flow profit.
I am not sure we have enough information to tell you to fire your accountant. The misunderstanding may be on your side. I would ask specifically for the HOA, why that would not be claimed as an expense. Ask what basis they are assigning to the property for depreciation. Make sure they have interest, taxes and insurance deductions.
Is your accountant actually an accountant or are they are tax preparer? There is a difference. Accountants have a degree in accounting. Some tax preparers go through an afternoon training and may have just a high school education. There is a major difference in competency. For basic taxes, it is fine, but when getting into advanced concepts like depreciation and business expenses, you want someone with better credentials.
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Molly L.
Olympia, WA · Member since 2014 · 3 posts · 0 votes
6y
Hi,
Hopefully I can shed some light on this.... income (rent)-expenses(see schedule E on tax forms for all included). This amount can be negative or positive depending upon the depreciation amount. Now you pay taxes on all income including the positive amount from the Schedule E - business income deduction - standard deduction and other deductions and credits. Personally I hit the 24% bracket this year by a few thousands. So some of it I was taxed at 22% and some 24%. But really as my preparer says, "If you are paying taxes, you are doing well"
This is SO different from the actual cash flow and net income for the property. So be sure you are making the calculations accurately. What is most important to me is the actual spendable cash I get off the property.
Cash Flow = Income-expenses (include everything here but not depreciation)-taxes
Net (Worth)Income = cashflow + principle paydown
Maybe I forgeting something here, but that is the way I think of it.
Also, you are very right.... you MAY need to make more than $300 per month to make it worth your while because your Cash Flow might be $300-60(taxes)=$240 per month and that may be too risky for you. You will need equity in the project to keep your payment lower and cashflow higher, to make yourself feel more comfortable probably.
Hope this helps
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