Rental Capitol Gains Taxes

8 Replies

Good Morning Bigger Pockets Faithfuls!

I found a great multiy family rental, it has 7 total units and I think I can get it at the right price. 

My remaining issue is the tax implications of owning the property, I have the property tax covered with the calculator but I am concerned about the capitol gains tax. The rentals will make approximately $4,375 per month but that will only produce a positive cash flow of roughly $700.... Will I have to pay capitol gains on the entire $4,375 per month or just the $700 per month. 

Any suggestions on where I can Learn more about this?

Cheers,

GettingaGrip

I have done all the calculations for you and determined that you will pay $0.00 in capital gains.

I would show you the math but think it would be best for you to figure it out on your own.  It is really simple math.  Perhaps reading the definition of capital gains would be a good first step.

Thanks Chris,

I am new to this and may be using the wrong language....perhaps it's income tax that I am concerned with paying. My concern is that I will be taxed on the full amount of rent I bring in and not just the properties positive cash flow. Can you confirm that or possibly point me in the right direction to research?

Originally posted by @Robert Perkins :

Thanks Chris,

I am new to this and may be using the wrong language....perhaps it's income tax that I am concerned with paying. My concern is that I will be taxed on the full amount of rent I bring in and not just the properties positive cash flow. Can you confirm that or possibly point me in the right direction to research?

No need to be concerned.  You won't have to pay tax on your gross rents.  You'll just be taxed on the rent you received MINUS any allowable deductions (i.e. mortgage interest, property tax, operating expenses, depreciation, repairs, etc).

you won't pay tax on your cashflow but rather your taxable (net profit) cashflow. So to tweek your numbers look at your mortgage payment and add your principle paydown to your cashflow number. Then you would subtract the depreciation expense which will depend on the method you take to depreciate your property...

Originally posted by @Robert Perkins :

Thanks Chris,

I am new to this and may be using the wrong language....perhaps it's income tax that I am concerned with paying. My concern is that I will be taxed on the full amount of rent I bring in and not just the properties positive cash flow. Can you confirm that or possibly point me in the right direction to research?

 Think of it this way, if you receive $1000 in rents and you pay $900 in expenses then your net income is $100.  That's what you pay taxes on.  That's the short answer.  

Here's a link to IRS Publication 527 that will give you the long answer.  It get pretty complicated if you're not too familiar with taxes and tax code. 

Personally, if I were you, I would hire a tax professional and let him/her deal with it for you.  A decent CPA isn't too expensive especially considering how much money they can save you.  If you really want to learn and do your taxes yourself, H&R Block has classes they teach for about $400-$500 every fall.  It's for on boarding new tax pros during tax season, but anyone can take the class and it covers a lot of the basics.  Just food for thought!

Good luck!  

-Jon

@Robert Perkins ,

I'd suggest downloading a Schedule E from the IRS website and working through it. It's not really as straightforward as being taxed on the positive cash flow.  If you're only $700 positive on $4,375 total rents you'll probably end up with a negative rental income on the schedule E, which is great for taxes.  Depreciation is a huge deduction, but not one you incorporate into the cash flow.

I'd say call an accountant/tax pro, but I feel like the process of completely jacking up one's taxes is a noble right of passage for anyone looking to get into real estate.  I only had to amend 4 years worth of returns after I went through mine with a pro the first time...humbling.

Good luck!

Thanks Guys, 

I appreciate the feedback sounds like I need to research what my deductions would be...I'll do that today. I know I don't want to over depreciate and get into a situation that I can't sell if selling becomes advantageous to me. 

Cheers,

GettingaGrip