landlord taxes - help me understand the benefits please!
Real Estate Agent · Tampa, FL · Member since 2009 · 456 posts · 123 votes
landlord taxes - help me understand the benefits please!
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Real Estate Investor · Las Vegas, NV · Member since 2008 · 1k+ posts · 447 votes
16yOriginally posted by Mark Claire:
Originally posted by Richard Warren:
The real simple version:
Another thing that people conveniently forget is that depreciation is “recaptured†when you sell.
Another thing that people conveniently forget is that depreciation is “recaptured†when you sell.
Richard, are you aware that if you die and pass on your fully depreciated property via will, it is NOT recaptured. You probably already know this, but thought I would throw it out for anyone reading...
That’s why I said it was the real simple version. The heirs get a step-up in basis and it is not subject to recapture. However, they are subject to estate taxes if the if the decedent has an estate sufficient in size to be taxable. Of course that can be mitigated through the use of advanced estate planning techniques such as Charitable Remainder Trusts, etc.
Again, this was just meant to be basic with the added recommendation that he do some more reading on the subject. When there is at least a basic understanding he should consult with a real estate savvy CPA to map out a tax strategy.
:cool:
6 Replies
- Real Estate Investor · Las Vegas, NV · Member since 2008 · 1k+ posts · 447 votes16y
The real simple version:
Any expenses directly relating to your business can be deducted.
Interest on Investment loans can be deducted.
Depreciation allows you to deduct a certain percentage of the value of buildings and property (not land) each year. The IRS has a depreciation schedule for all different types of property based on their life expectancy. There are caps on the amount that you can deduct. Another thing that people conveniently forget is that depreciation is “recaptured†when you sell.
These write-offs are used to reduce your taxable income but are subject to limitations imposed by the IRS. A real estate investor should, at the very least, have a basic understanding of how these deductions work. There are plenty of books on real estate investing that examine this.
:cool:
- Real Estate Investor · Sentenhart, Wald · Member since 2009 · 110 posts · 75 votes16y
Corey,
You really do need to speak with a tax accountant and get the laws as they pertain to depreciation, expenses, and tax implications.
Listening to non-licensed , non-practicing wanna-bes can get you into some serious trouble, or at least some serious losses, tax or otherwise, as well as lost oppurtunity.
That said, property taxes and mortgage-interest are legal expenses for a rental business.
How you handle depreciation depends on when the property went into service and should be thought out with a pro as you budget repairs and maintenance.
Should I capitalize this cost or expense it? These answers depend on your income situation, taxable gains/losses, your investment goals, etc., and until you fully understand the ramifications, should be discussed and planned with an accountant. - 16yMark UpdegraffBusiness MemberReal Estate Broker · Rochester, NY · Member since 2010 · 1k+ posts · 701 votes
Originally posted by Corey Demuth:
I keep reading about how there are so many benefits to being a landlord, because you can reduce your income taxes and such...
Can anyone please explain how it works? Like a basic overview? I have heard people talk about appreciating/depreciating but it went over my head a bit... how does it work?
Also, an investor was telling me that you can deduct the interest you pay on property loans, and effectively bring your taxable income down to a very low percentage... but I also heard that you can only deduct the interest on your primary residence. Plus wouldn't there be some kind of system or rules in place to prevent people from avoiding paying taxes by owning a lot of property?
Read Nolo's "every landlord's tax deduction guide" if you're getting into the buy / hold / rent game. You will want to have a CPA handle everything, but you also need to understand what is going on.depreciation: the basis of the house is depreciated over 27.5 years (i believe anyway)
Flooring depreciates over 5 years
if you add things like a roof they go onto the basis of the house.
so you divide the basis by 27.5 and every year you subtract that off your income - that reduces the amount of taxable income.
Other deductions:
Interest on any financing
capital improvements
a portion of you cell phone bill
your business laptop
stamps
mileage to and from rentals, home depot etc
etc etc etc etcyou can't claim a business loss for more than 5 years I believe. The IRS wants you to be sucessful, so they can tax you. They're looking for people trying to evade the system. Don't do that! You get 5 years to operate at a loss (no income tax) before the red flags start waving.
Updegraff Group Realty4.746 Reviews - 16yMark UpdegraffBusiness MemberReal Estate Broker · Rochester, NY · Member since 2010 · 1k+ posts · 701 votes
Originally posted by Richard Warren:
The real simple version:
Another thing that people conveniently forget is that depreciation is “recaptured†when you sell.
Richard, are you aware that if you die and pass on your fully depreciated property via will, it is NOT recaptured. You probably already know this, but thought I would throw it out for anyone reading...IE - I buy SFR for 100K, hold and fully depreciate. Now I die, my son inherits - he sells for 200K,
amount of tax due = 0!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
(note, no capital gains on the appreciation either!!!)Cheers!
Updegraff Group Realty4.746 Reviews - Real Estate Investor · Las Vegas, NV · Member since 2008 · 1k+ posts · 447 votes16y
Originally posted by Mark Claire:
Originally posted by Richard Warren:
The real simple version:
Another thing that people conveniently forget is that depreciation is “recaptured†when you sell.
Richard, are you aware that if you die and pass on your fully depreciated property via will, it is NOT recaptured. You probably already know this, but thought I would throw it out for anyone reading...
That’s why I said it was the real simple version. The heirs get a step-up in basis and it is not subject to recapture. However, they are subject to estate taxes if the if the decedent has an estate sufficient in size to be taxable. Of course that can be mitigated through the use of advanced estate planning techniques such as Charitable Remainder Trusts, etc.
Again, this was just meant to be basic with the added recommendation that he do some more reading on the subject. When there is at least a basic understanding he should consult with a real estate savvy CPA to map out a tax strategy.
:cool:
- Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes16y
But lets back up for a second and look at the story promoters often tell newbies in order to sell a crummy deal.
You buy a rental. You collect the rent. You have expenses, which the promoter will say are taxes, insurance, maybe a little maintenance and maybe property management. You also pay interest on your loan.
So, you take your rent and subtract all your expenses and your debt service (your full P&I payment) and get your cash flow. That's often a pretty unimpressive number. You should know at this point that as unimpressive as it is, its often optimistic because the expenses aren't complete.
Then, the promoter tries to make the deal look better by touting the tax advantages. The story says to back to the start. Take rent, subtract all those expenses, subtract the interest payments and subtract deprecation and you get your taxable income. That's very typically a negative number. Sometimes a pretty large negative number. This is your passive loss. Guess what, they claim, you can use that negative number to offset your other income.
They figure out the "negative tax" on that passive loss. They then add this negative tax back onto the cash flow and, viola la, you have a positive "after tax cash flow".
Unfortunately, its just a story. It does work, but only under a very limited set of circumstances. You have to have income to offset, but only a little so you don't exceed the AGI limits for this special allowance. You have to have a rental, but only a few so you don't exced the special allowance. And then you have to give it back if you do sell in the form of depreciation recapture tax.
Bottom line, if the cash flow (the first number we computed) looks good, its a good deal. If that looks bad, and the deal only looks good with the "tax advantage lipstick", its a crummy deal.
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