Rental Property tax question - Posted by Bill (TN)

Posted by David Krulac on October 13, 2003 at 16:33:06:

if you make more than $150,000 regular salary income, you are NOT eligible to take ANY passive losses. These losses may be out of pocket, but if anything they would be depreciation (not out of pocket). So say your earnings maintain the above $150,000 threshold and you keep the property for 10 years. Then when you sell ALL the accumulated passive losses, say for example they were $3,000 per year, or $30,000 for the ten year period. Than $30,000 would off set the first $30,000 of capital gains.

#2 income transferred to lower bracket. I miswrote!
TAKEN depreciation transfers your income from the ordinary income, for most people 28% or thereabouts to the capital gain rates of 15% for most people.

Rental Property tax question - Posted by Bill (TN)

Posted by Bill (TN) on October 11, 2003 at 22:42:04:

I am in the process of aquiring a few rentals houses that I will manage myself. I have a regular job that pays 150K plus. How will the rentals that I buy effect my taxes? I know I can deduct repairs, fix up,etc. I know I can deduct interest I pay to the bank and property taxes? But can this be applied to my personal income to lessen my tax bite?

Re: Rental Property tax question - Posted by Dimpil

Posted by Dimpil on October 12, 2003 at 15:55:53:

Please see your accounant. If you are making 150g’s a year I’m sure you have an account. Even if you have one, I’d start interview others as you want an account how invests himself and will walk up to the tax line and dance on it like a gymnist on a balance beam and not fall over it. Agressive, but careful.

If you make money… - Posted by Clemuel

Posted by Clemuel on October 12, 2003 at 14:54:51:

Bill,

If you show on paper that you are not losing a fortune, then you are not being creative enough with your accounting. Real estate is one of the last true tax shelters. Deduct anything you can and then some. Deduct all your home supplies, all your tools, all your materials. Your grass seed, your pickup truck, your decorator blinds. That Viking Stove. Thos magazines, books and webs site costs. Your Net access, your pone bills, your lawyers’ fees. Your property tax. The dimes you put in the parking meters. Deduct it all, the depreciate the places. Don’t forget the gas, electric, fuel oil, gas for the mower.

Darn, when you’re done, you better have that $20,000 loss each year. Let Uncle Sam pay for your mortgage this way. Geez, if you don’t he’ll just give it to more illegal aliens or welfare cheats!

Clemuel.

Good news and bad news… - Posted by David Krulac

Posted by David Krulac on October 12, 2003 at 08:17:21:

for one thing since you earn more than $150,000 on your regular job you are not eligible to take depreciation. You defer it until you sell then take it against your gain.

Your labor is never deductable, but all costs with the exception of principle payments are deductable. Mileage is deductable as well as tools that you need for your properties.

David Krulac
Central Pennsylvania

Re: Rental Property tax question - Posted by ecb

Posted by ecb on October 16, 2003 at 07:01:26:

Yes, you can show losses. And, yes, you should deduct all that you can legally.

Here’s the problem:

Rental income (after expenses) is transfered to the front page of your 1040. Most of the time, you will show a loss due largely to depreciation (i.e., a paper loss). However, at the $150k income level (and I’m above that as well which is why I know something about this), your deduction from real estate losses are limited. Last year, I was able to take a third of the actual loss. You eventually recoup it (upon the sale of the house(s) all losses not recognized get pushed foward to offset any gain), but it is not the panacea most people make it out to be.

Here’s a rule of thumb. When your interest costs (if there are any) exceeds your depreciation, then you sell.

Quite frankly, I’ve given up on the tax game. I’d just a soon show a profit as a loss. I truly am indifferent. It makes no difference either way. If I show a loss, I cannot deduct all of it. If I show a gain, I’m getting taxed. Might as well show a profit and pay the taxes.

The real value in real estate is the equity build up that does not get taxed. In a way, it’s a bit like a 401k or IRA. The value goes up each year, but until you sell, your not taxed on it.

Hope that helps.

ecb

Truer words were never spoken!! - Posted by Rich Hyams

Posted by Rich Hyams on October 12, 2003 at 18:06:45:

"Darn, when you’re done, you better have that $20,000 loss each year. Let Uncle Sam pay for your mortgage this way. Geez, if you don’t he’ll just give it to more illegal aliens or welfare cheats! "

you forgot one thing… - Posted by David Krulac

Posted by David Krulac on October 12, 2003 at 16:49:06:

since Bill makes over $150,000 he can NOT deduct ANY passive losses against ordinary income. So if he lost $20,000 a year, he would have to carry it forward until either:

  1. His income dropped below $150,000 or preferably below $100,000.

  2. He had PASSIVE gains to offset his passive losses.

  3. He sold the the property and deducted carry forward losses against capital gains.

David Krulac
Central Pennsylvania

Re: Deductable??? - Posted by Rich Hyams

Posted by Rich Hyams on October 12, 2003 at 19:03:51:

My friend and I are partners in Muffin Properties(funny picture of us at www.muffinproperties.com(I don’t have a better use for the domain other than e-mail yet))

I own MuffinPC(www.muffinpc.com), I am going to have me and a couple of my guys do some work and plan to charge Muffin Properties say $500 a day for me and two of my guys. Really, part of that $500 will be my labor, I can’t see how that possibly doesn’t come off the profit of Muffin Properties.

If I am right, I am getting a deduction for my labor.

While I may have stated that very positively, I am really asking your opinion.

Re: Good news and bad news… - Posted by Bill (TN)

Posted by Bill (TN) on October 12, 2003 at 09:28:53:

I have always looked at depreciation as a pay me now or pay me later anyway. Once you sell you have to recoup the depreciated amount.

But according to your post the intrest I pay to the bank and taxes I pay are deductable from my normal income? This would make a substancial difference in taxes.

Re: you forgot one thing… - Posted by E.Eka

Posted by E.Eka on October 13, 2003 at 08:19:15:

Thanks David, you just saved me some time of explanation. I’m pretty sure the passive losses capp out at $25,000 and there’s a phase out period.

Re: you forgot one thing… - Posted by Bill (TN)

Posted by Bill (TN) on October 12, 2003 at 22:06:35:

I like the post about deducting everything including my car, boat (If I can find a waterfront rental), phone, lawn mower etc. However I have a questions on the following post.

>since Bill makes over $150,000 he can NOT deduct ANY >passive losses against ordinary income. So if he lost >$20,000 a year, he would have to carry it forward >until either:

>1. His income dropped below $150,000 or preferably >below $100,000.

>2. He had PASSIVE gains to offset his passive losses.

>3. He sold the the property and deducted carry >forward losses against capital gains.

  1. Income drop below 150K is not likely (I guess that is a good thing) but I could drop my adjusted gross income some I think by buying a 2nd home or vacation home.

  2. PASSIVE gains, would that be rental income? So that is what I would be able to offset. ie. any positive cash flow?

  3. When property is sold I can deduct capital gains. Well I am 19 years until retirement so I guess I would have accumulated enough carry foward to offset a large chunk of my gains.

My taxes are fairly straight foward right now and I use turbotax for my taxes. A group of us at work in my same situation get together and completely go thru every possible deduction we can take. So until now I have not needed an accountant.

Re: Good news and bad news… - Posted by David Krulac

Posted by David Krulac on October 12, 2003 at 09:50:53:

interest, taxes, utilities, and all expenses except Your labor and principle payments are deductable on Schedule E. Your expenses are against your rental income and if expenses exceed rental income then they are deducted from your regular job income. If income exceeds expenses then you would ADD the difference to your regular income.

that’s right… - Posted by David Krulac

Posted by David Krulac on October 13, 2003 at 17:46:56:

since the 1987 tax changes the cap is $25,000, if your income is less than $100,000. Phase out to zero for income between $100,000 and $150,000.

I was a real estate investor before 1987 and loved the unlimited passive losses and shorter depreciation schedules, as well as accelerated depreciation. You could depreciate a rental property over 15 years versus the current 27.5 years. It was fairly easy to have a full time job and pay no taxes with passive losses equal to or exceeding your salary. Ah, the good old days!

passive losses/gains can be - Posted by David Krulac

Posted by David Krulac on October 13, 2003 at 17:42:46:

rental as well as stock, bonds, etc. So you could use your passive losses from rental if you had passive gains from stock, presuming that you’re not a stock dealer/broker.

hopefully you will have lots of capital gains to far exceed your passive losses.

The maximum passive loss anybody can take is $25,000 per year, since 1987, povided you earn less than $100,000. Between $100,000 and $150,000 there is a phase out until zero.

Re: you forgot one thing… - Posted by E.Eka

Posted by E.Eka on October 13, 2003 at 08:24:40:

Passive income/losses is rental income. Income that you primarily don’t have to substantially work for in order to earn. If you can legally dropp your AGI (adjusted gross income) then do so. But in order for it to be a meaningful change it would have to drop substantially.

You can only offset passive income with passive losses. So you can’t offset your rental income losses with your ordinary income. Any passive losses are then carried forward. Passive income is added to your 1040.

There can be a lot here. When dealing with investments and other creative ways of doing taxes, it’s always best to consult a licensed tax professional. It’s worth the investment.

Re: Good news and bad news… - Posted by Bill (TN)

Posted by Bill (TN) on October 12, 2003 at 11:03:32:

I was under the impression that I would get a tax break just for having the rental real estate. So if I have a rental with 0 cash flow and incure 0 expenses my taxes would be exactly the same?? That kinda sucks.

Re: that’s right… - Posted by Eric in N. FL

Posted by Eric in N. FL on October 13, 2003 at 18:52:59:

David,
It still is very easy to receive back all of your paid income tax if you are a highly paid, married employee. Real estate professional status for the stay at home mom. It is absolutely beautiful!!! Take my word for it.

-Eric

Re: passive losses/gains can be - Posted by Phil White

Posted by Phil White on October 14, 2003 at 11:13:16:

Just to clarify David’s comments: Proceeds from stock and bond transactions are not included in passive income. Passive losses from real estate activities cannot be used to offset these gains (although many people probably have large capital loss carry forwards which can be used to offset any current capital gains). As always–consult your tax advisor, I only play one on TV.

Re: Good news and bad news… - Posted by E.Eka

Posted by E.Eka on October 13, 2003 at 08:28:10:

That’s why you need a licensed tax professional, so that he/she can show you the tax laws and explain them as they pertain to your situation.
Most Guru’s will tell you the importance of building a good team when investing.