Less taxes on rental income

Denver, Colorado
Tax Liens & Mortgage Notes
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Less taxes on rental income

Ali Alain
Member since 2020 · 4 posts · 3 votes

Hi there, 

I have a question regarding taxes on rental income. I live in Colorado and I've put my property on Airbnb which generate $500-700 as cashflow per month. My question is: If I decide to put those gains back into my mortgage, will I still have to pay income tax on those gains that I don't have anymore ?

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Dan H.Pro Member
Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
3y
Quote from @Ali Alain:

Is it common practice among professionals to deduct full rental income through what I mentioned above or even have negative income ? Also are repairs that improve the house also deductible ? 


Thanks guys for your answers it's very helpful.


 If your rental deductions exceed your rental income (hopefully not a regular occurrence), there is an income limitation on being able to take the full deduction in the year incurred.  If you are an RE professional, the income limitation does not apply.  If you cannot take the full deduction due to income constraint (and not being an RE professional), you can "bank" the deduction to be used in the future. 

The IRS defines the qualification to be a RE professional.  It sets a minimum hour threshold, but also requires the RE hours to exceed all other employment hours, which I think is BS.  They tax side hustles as though you were professional but do not allow the advantage of being classified a professional when it should be able to be to your advantage (note I am not against setting qualification to be a RE professional; I am against one of those rules stipulating that it has to be your work hours greater than other jobs).  I do not make the rules, I must play within the rules.  My wife qualifies as a RE professional under IRS rules (and this year I also would qualify).  

I am not an accountant or tax professional.  Verify everything I indicated with your trusted tax expert.  

Good luck

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    3y

    @Ali Alain

    Yes

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    0Reply
  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    3y

    Yes.

    You still earned the money. Then you are spending your earning on mortgage paydown. Which will save you interest on the loan.

    0Reply
  • Jaron WallingPro Member
    Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
    3y

    It's still taxable income. 

    0Reply
  • Jacob St. MartinPro Member
    Investor · Charlottesville Virginia · Member since 2021 · 348 posts · 346 votes
    3y

    Yes, and I would recommend not putting that money toward your mortgage. If you think about it every payment you make is lowering your return on equity. I you were to take that capital and either save up and put it into another property or put it into another asset class likes stocks you will get a higher return from it than you would if it was sitting as equity. Especially if you go get a heloc or a cash out refi later, you essentially put all this money in as equity just so that you could borrow it later and pay point fees and interest. Why put it in in the first place?

    1Reply
  • Ali Alain
    OP
    Member since 2020 · 4 posts · 3 votes
    3y

    Thanks for answering guys ! I remembered reading somewhere that putting your cash flow back into your mortgage will make you avoid paying taxes on those gains I guess I misunderstood.. Well if it's not the case then there's no point paying the mortgage quicker. I have 2 questions for you guys:

    1) What's the maximum I can deduct per year from my rental income? As far as I understand, I can deduct mortgage interest, repairs, utilities, HOA, insurance...


    2) Are there anything else I'm missing?

    1Reply
  • Bruce Lynn
    Real Estate Broker · Coppell, TX · Member since 2011 · 5k+ posts · 4k+ votes
    3y

    @Ali Alain   Depreciation and potentially bonus depreciation.   Repairs will depend on what they were....basic handyman type stuff is probably full deduction...if it is something like a roof, then you probably have to use some type of depreciation schedule.

    Potentially you can deduct the full rental income or even more and have negative income....this is a discussion with your CPA.

    0Reply
  • Ali Alain
    OP
    Member since 2020 · 4 posts · 3 votes
    3y

    Is it common practice among professionals to deduct full rental income through what I mentioned above or even have negative income ? Also are repairs that improve the house also deductible ? 


    Thanks guys for your answers it's very helpful.

    1Reply
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    3y
    Quote from @Ali Alain:

    Is it common practice among professionals to deduct full rental income through what I mentioned above or even have negative income ? Also are repairs that improve the house also deductible ? 


    Thanks guys for your answers it's very helpful.


     If your rental deductions exceed your rental income (hopefully not a regular occurrence), there is an income limitation on being able to take the full deduction in the year incurred.  If you are an RE professional, the income limitation does not apply.  If you cannot take the full deduction due to income constraint (and not being an RE professional), you can "bank" the deduction to be used in the future. 

    The IRS defines the qualification to be a RE professional.  It sets a minimum hour threshold, but also requires the RE hours to exceed all other employment hours, which I think is BS.  They tax side hustles as though you were professional but do not allow the advantage of being classified a professional when it should be able to be to your advantage (note I am not against setting qualification to be a RE professional; I am against one of those rules stipulating that it has to be your work hours greater than other jobs).  I do not make the rules, I must play within the rules.  My wife qualifies as a RE professional under IRS rules (and this year I also would qualify).  

    I am not an accountant or tax professional.  Verify everything I indicated with your trusted tax expert.  

    Good luck

    2Reply
  • Janel Kolbo
    Rental Property Investor · Tampa, FL · Member since 2021 · 39 posts · 37 votes
    3y
    Quote from @Ali Alain:

    Hi there, 

    I have a question regarding taxes on rental income. I live in Colorado and I've put my property on Airbnb which generate $500-700 as cashflow per month. My question is: If I decide to put those gains back into my mortgage, will I still have to pay income tax on those gains that I don't have anymore ?


     Watch/listen to the BP episode with Matt Bontrager, CPA. Bonus depreciation only if you've purchased after 2017 but there are still other ways to save on taxes!

    1Reply
  • Ali Alain
    OP
    Member since 2020 · 4 posts · 3 votes
    3y

    Thank you for your answer ! I have another question related to Airbnb. Are the fees (Host service fees) that Airbnb takes out from each rental deductible or not ?

    0Reply
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