Rental real estate tax benefits
Property Manager · Prineville, OR · Member since 2016 · 261 posts · 166 votes
Rental real estate tax benefits
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votesIt is unclear from your description whether or not you have tenants in the other 3 units. If you do not currently have tenants in the other 3 units, then what is the reason? It is also unclear what you mean by "not making money."
Once you move out, this is a 4-unit rental property. You would add up the rents from all four units, subtract all eligible expenses, subtract depreciation, and look at the result. If the result is a positive number, your taxable income and your taxes go up. If the result is a negative number, your taxable income and your taxes might go down, and they might not. It depends on your overall tax situation for the year, for instance on your occupation listed as "contractor" which can mean a lot of different things.
Of course you're "a little cloudy" because this whole thing is far more complicated than my one paragraph above. For instance:
- you need to know which expense you can deduct. Some of the advice you received on this thread is wrong: you cannot deduct PITI, only ITI. Some repairs can be deducted, and others cannot. It's not simple.
- you need to know how to calculate depreciation. There're some good tips on this thread, but it's not enough to do it correctly on your own.
- you do not deduct depreciation against your income, it goes into that whole calculation I mentioned: rent minus expenses minus depreciation
- the resulting number known as "net rental income or loss" can be improved with certain tax strategies. Sometimes it makes sense to do it, and sometimes it does not. It again depends on your overall financial situation.
For this year, we would need to figure out how the units are used. If you live in one and rent the other 3, then you have two properties for tax purposes: a personal residence and a 3-unit rental property. You need to allocate expenses between them. The rental portion will be treated the same as if your entire property was a rental, except only part of your expenses will count.
And if this was not enough complexity, the fact that you live in this property adds extra rules to deducting some of the shared expenses. Do you still want to DIY it?
6 Replies
- 5yAshish AcharyaBusiness MemberCPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
Originally posted by @Patrick Flanagan:
I’m a little cloudy on the specific tax Benifits you get from owning rental real estate.
So please correct me if I’m wrong....
I bought a 4 plex this year with a VA loan, it's considered my primary residence. I don't make money in it each month due to living there. I will once I move out.
I bought it for 750k, so would I divide that by 27.5 years?? That would be $27,272. So do I get to deduct 27k off my taxable income??
No, it's not that easy.
First, you will factor in depreciation to calculate net rental income or loss. Yes, depreciation is deducted against your income.
- If you have a net income, you don't get to offset anything and you will pay tax on your net income. However, you need to understand that you just avoided taxes on at least $27,272 of income via depreciation (phantom cash out flow).
-If you have a net loss, you could deduct the losses against your income three ways:
1) If your modified AGI is between 100k- 150k and you actively manage your property. If more than 150k, go to #2
2) If you qualify as real estate professional and you meet the material participation requirement. If not, #3
3) the loss that was suspended because you didn't meet 1 and 2 can be used if you have other passive income or when you eventually dispose of the property.
INVESTOR FRIENDLY CPA®5240 Reviews - 5yGreg ScottPro MemberRental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
Please don't try to do your taxes yourself based on advice you get on a forum. You will want to have a CPA ensure it is done correctly. In the long run, it will save (or make) you more money.
First of all, you've calculated depreciation incorrectly. You cannot depreciate the portion of the purchase attributed to the value of the land. I don't know what that is in your case. For now, let's say the correct depreciation is $15K and you are not living in the property. When you go to take that depreciation, you don't deduct it from YOUR taxes, you deduct it from the income this property produced. Likely, the property will show a loss. How much of that loss flows through to your personal return will depend on numerous other factors, so it is not a clear-cut yes / no.
If this were just a single family home you were not renting, there is no depreciation. Given this is a multi-unit you are house hacking, I'm not clear how that is applied exactly. I'm sure the IRS has some unique rules for that, which is why it is important to engage a tax professional.
- 5yMatthew BrillPro MemberInvestor · Boca Raton, FL · Member since 2015 · 234 posts · 103 votes
You should definitely have a CPA do this for you. I am not a CPA.
You would break the all the costs of the property into fourths. 1/4 is your primary (depreciation and other expenses don't factor in) and the other 3/4 is a rental. So your depreciation each year would be 1/27.5 of 3/4 of the improvement only (property value - land value). You would also take 3/4 of PITI and 100% of the expenses of your 3 rental units (none of the expenses to the unit you occupy) and that would be expenses for your rental business. Gross income minus those rental business expenses will be your net income (or loss). From there you subtract the depreciation amount to get your taxable income (likely negative), and that will flow through to your personal tax return. The degree to whether you can use it or not will depend on your personal AGI as detailed by @Ashish Acharya.
- 5yMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
It is unclear from your description whether or not you have tenants in the other 3 units. If you do not currently have tenants in the other 3 units, then what is the reason? It is also unclear what you mean by "not making money."
Once you move out, this is a 4-unit rental property. You would add up the rents from all four units, subtract all eligible expenses, subtract depreciation, and look at the result. If the result is a positive number, your taxable income and your taxes go up. If the result is a negative number, your taxable income and your taxes might go down, and they might not. It depends on your overall tax situation for the year, for instance on your occupation listed as "contractor" which can mean a lot of different things.
Of course you're "a little cloudy" because this whole thing is far more complicated than my one paragraph above. For instance:
- you need to know which expense you can deduct. Some of the advice you received on this thread is wrong: you cannot deduct PITI, only ITI. Some repairs can be deducted, and others cannot. It's not simple.
- you need to know how to calculate depreciation. There're some good tips on this thread, but it's not enough to do it correctly on your own.
- you do not deduct depreciation against your income, it goes into that whole calculation I mentioned: rent minus expenses minus depreciation
- the resulting number known as "net rental income or loss" can be improved with certain tax strategies. Sometimes it makes sense to do it, and sometimes it does not. It again depends on your overall financial situation.
For this year, we would need to figure out how the units are used. If you live in one and rent the other 3, then you have two properties for tax purposes: a personal residence and a 3-unit rental property. You need to allocate expenses between them. The rental portion will be treated the same as if your entire property was a rental, except only part of your expenses will count.
And if this was not enough complexity, the fact that you live in this property adds extra rules to deducting some of the shared expenses. Do you still want to DIY it?
- 5yAaron ZimmermanBusiness MemberAccountant · Chicago, IL · Member since 2018 · 2k+ posts · 1k+ votes
As stated above, I would caution doing this yourself. There are far too many traps to get into, with the biggest amongst what I see from my clients are:
1. Depreciation calculation - this is not straightforward with a house hack
2. Allocating common expenses - you can allocate common expenses based upon a formula of # of bedrooms used or square footage of each unit. For the vast majority of my clients, I use bedrooms as it's generally easier and more advantageous.
3. Allocating non-common expenses (i.e. repairs) - depending on which unit(s) work is being performed for repairs, you may be able to deduct a portion of it, none of it, or all of it.
This is definitely not a DIY job and there are too many pitfalls. For the cost of preparing the tax return (which a portion can be deductible), it is simply not worth your time and effort. Your time and effort are best concentrated on either finding more properties or optimizing your current house hack.
Brick House CPAs53 Reviews - 5yBasit SiddiqiBusiness MemberAccountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
House hacking makes your tax situation more complex.
You purchased a property that is treated as both an investment property and a personal residence. As such, payments that you make need to be prorated between business deductions and personal deductions.
Payments that you make normally fall into one of 3 buckets
100% of the payment can be factored in somewhere on the return
Partial payment can be factored somewhere on the return
0% of the payment can be factored in somewhere on the return
House-hacking also has considerable tax implications in the event that you want to sell this property.You can potentially defer a portion or all of the gain on the investment property with 1031 exclusion.
You can potentially exclude a portion or all of the gain on the personal residence with section 121 exclusion
Basit Siddiqi CPA4.979 Reviews
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