Tax deduction question from first investment property

2 Replies

Hi,

I am interested in my first investment property but I am trying to understand all tax pros/cons beforehand.

Let’s say I get paid through a w2 and also 1099 (self employed) and I have to pay about 10k annually on taxes from my 1099.

If I own my investment property , and even though it is cash flow positive, can I deduct all expenses associated with managing this property (travel, furniture, utilities etc.)? Let’s say this adds up to 8k for my first year. Will this 8k be deducted from my 10k that I would owe bringing my total down to 2K? Or are these two separate businesses?

I hope I explained this correctly.

Thanks in advance for any help and guidance.

-Chris

@Chris Klingemann

Of course, consult a qualified professional..

The first thing to understand is your W2 and 1099 income is considered active income.  Rental activities are categorized by the IRS as passive income.  So, its like having two separate "books" if you will.  Add/subtract your active income.  Then, add/subtract your passive income (i.e. rents) from your passive deductions (reference IRS form SchE).

As for taking passive deductions on your 1040 (your active income), here is the short version. If you're modified AGI is less than $100k, you can take $25k of passive losses onto your 1040. As your modified AGI gets to $150k, that $25k passive allowed loss decreases to zero. You also need to be actually spending time on your rentals and participating in their activities (as opposed to using a property manager basically). The other option is qualifying as a Real Estate Professional which lets you take every deduction. However, this qualification has little to do with its title. The main sticking point is you need to have more than 50% of your hours in real estate activities. So, as a W2 earner, that's next to impossible. So, you should be doing about 2000 hours a year for your W2 job. That means you need to be doing 2001 hours a year on your rentals --- kinda hard...

Oh, another thing.  I'm not sure if you just typed out your question incorrectly.  If you owe $10k annually in taxes, the deductions don't decrease your tax.  These are deduction and NOT tax credits.  So, say your W2 says you earned $80k for the year.  Then, if you had $25k of passive allowed losses and passed the criteria to take the losses, then your agi will become $55k.  Now continue and calculate your taxes...

Also, just because you can't take the passive deductions doesn't mean they are lost.  They are carry over as passive allowed losses (PAL) year after year.  This happens to most investors.  When you go to sell the PAL is realized.  But, when sell is another matter...

Make sense?  I hoped this helped.  Good luck.

Originally posted by @Chris Klingemann :

Hi,

I am interested in my first investment property but I am trying to understand all tax pros/cons beforehand.

Let’s say I get paid through a w2 and also 1099 (self employed) and I have to pay about 10k annually on taxes from my 1099.

If I own my investment property , and even though it is cash flow positive, can I deduct all expenses associated with managing this property (travel, furniture, utilities etc.)? Let’s say this adds up to 8k for my first year. Will this 8k be deducted from my 10k that I would owe bringing my total down to 2K? Or are these two separate businesses?

I hope I explained this correctly.

Thanks in advance for any help and guidance.

-Chris

 

  1. Chris, the majority tax saving from the RE activity comes to form the actual tax loss (Not cash flow loss) rather than the expenses associated with managing the property. Yes, you have deducted the expense associated with managing the property as well, but its not going to be material tax savings. 
  2. If you meet the exception of passive activity loss deduction, your rental tax loss will offset your income, not your tax amount. So 8k loss would offset your W-2 income rather than take on your W-2. 
  3. 8k against your 10k tax is what tax credits do, not deductions. 


Also, just having a tax loss should be your goal if you are buying more properties in the future. Your lender will not lend with a huge loss on your tax return. Your goals shouldn't be a huge tax loss.