What does it mean to run a property at a loss for purposes?

Question

I meant at a loss for tax purposes. Yes, what does that mean? And is it ok to do so? Why or why not?

Pat L. · Answer

One of our 'clients' went to re-finance some of the many properties he has with us as our rates are much higher. He got turned down because he has never shown a profit (regardless of depreciation) ??? All of a sudden he's showing a very nice rental income ... do ya think the IRS will also notice???

Basit Siddiqi · Answer

For tax purposes - you get to write off a portion of the purchase price as "depreciation" even though the value of the property may go up.

So you may operate at a positive cash-flow but still show a tax loss.

Joe Hines · Answer

@Randall Alan is exactly right. And to clarify one thing: I don't think it is a good idea to run your property at a hard loss (negative cash flow) thinking that you'll get a big pop when you sell it. I know plenty of people do this and I wish them every success. It's great if you are in the right location and in the right market conditions. Speaking for myself, however, negative cash flow is a deal breaker. In addition to insurance, taxes, P+I, landscaping and vacancy rates, be sure to include a capital a percentage of your rental income for major capital events (roof, air conditioner, etc) and basic operating expenses to be sure the investment is going to be sound even when you hit a rough patch.

Sorry if I'm telling you something you already know, but I sensed you might be very new to real estate investing and this is a mistake I see a lot.

Randall Alan · Answer

When we first get into a property we often have to do some renovations to get it up to speed to rent. By the time you take your rents as your income, less all your expenses and depreciation, it is totally possible to have a loss on your property. It's truly just a sum of its parts. It doesn't even mean you didn't have a net positive cash flow on your property. If you have multiple properties your loss on one will help offset gains on another.

We have 40 units and between all of them, on paper (from an IRS perspective) we were able to write off all but $9,000 from just under $400,000 in rents. 3/4 of the properties are financed, so lots of mortgages, insurance, property taxes, etc to write off. Any legitimate business expense counts to reduce your taxable income, cars, phones, health insurance, professional services, even business meals count at 50%. Depreciation is along the lines of 3% of the value of your properties... at $2,000,000 in value, that's $60k right there! Find a good tax accountant and they will work their magic!

What does it mean to run a property at a loss for purposes?

What does it mean to run a property at a loss for purposes?

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