patrick.net

I talked to a CPA about this awhile ago when I rented out my condo so I'm not 100% sure but here's what I THINK is correct (this was about 5+ years ago so you should confirm from an expert).

1). You cannot "double deduct": i.e. you cannot deduct the interest you're paying on the rental loan AND deduct this same interest from what you're receiving in rental income. For example: You cannot deduct $10k in interest from your taxable income AND deduct it from what the renter is paying you.

2). You CAN deduct the costs associated with running the place and maintaining the home.

3). If your mortgage is MORE than the rent I am pretty sure you don't owe taxes because it's a loss.

"Z" would be taxed at your taxable bracket

Oh boy. As already mentioned by others on a different thread, there is a sizeable depreciation expense. Each year you can deduct 1/27.5 the value of the building (this is recaptured at the time of sale). In another words, short of having a cash flow monster, profit = Z - X (interest only) - Y - depreciation - other expenses. In the early years (lots of interest to deduct) you will most likely has a loss (negative profit). Ka-ching! You've effectively lowered your marginal tax rate. YMMV as there is a phase out for passive loss deductions (around $100k AGI).
BTW, I've never gotten a straight answer from any of the board LLs. Do you value you building straight from property tax records, get an independent appraisal, or wing it (and hope you don't get audited).

IANAA.

BayArea says

Or is the tax based on profit?

Rental income goes on Schedule E.

Taxable Income = receipts (Z) less expenses (X "interest portion" and Y and whatever else including non-cash expense like depreciation) So you can very well have 10K in cash flow, but 0 current tax on your rental if depreciation is 10K.

Thank you for the replies everyone. However, interestingly I have three replies and three difference answers, lol.

One person says Z is taxable

One person says it is (Z - X (interest only) - Y - depreciation - other expenses)

And the last person says it is (Z - X - Y - depreciation - other expenses)

:-)

Your rental income, less R/E taxes, mortgage interest, depreciation expense, and other expenses such as association fees, repairs, rental commission etc . . .

If the total deductions (expenses) is less than your rental receipts, you have a net income and you have to pay at the regular rate. If you have a net rental loss, you can deduct the rental loss of $25,000/ year if your adjusted gross income is less than $100,000. Look up you last year tax return to see what your AGI is. The loss deduction is phased out at $.50 for every dollar your AGI is more than 100K, up to $150,000.
Non-deductible loss is added back to the cost of the house, and when you sale the house at a loss, you can deduct all of your loss, and if you have a gain, it's going to be taxed at the capital gain tax rate which is lower than the regular income tax.

BayArea says

Or is the tax based on profit?

It's essentially taxed based on profit. Depreciation is one of the costs lowering profit. Depreciation lowers basis, so this is later recaptured to some extent.

Both EBGuy and SFace said interest only for X. That's because interest is the only cost. The principal will come back to you when you sell.

Also, certain improvements might be capital expenses, which you can only add to basis.

If you are not a real estate professional, then you may be limited in what you can deduct, as songcon and EBGuy mentioned.

Thanks for the reply everyone. Let's take two scenarios (I'm ignoring property tax, depreciation expenses, etc for simplicity)

a.) Mortgage = $1000, Rent = $1500 ($500 profit)
b.) Mortgage = $2000, Rent = $1500 ($500 loss)

When it comes to taxes, you would claim rental income as $1500 regardless of whether it is scenario a or b, correct (minus interest, deduction, etc)?

Don't tunr around the commisioner's in town - yawn

http://www.youtube.com/watch?v=hQIo1IGthSM&feature=related

fuck off commisioner

BayArea says

Thanks for the reply everyone. Let's take two scenarios (I'm ignoring property tax, depreciation expenses, etc for simplicity)

a.) Mortgage = $1000, Rent = $1500 ($500 profit)

b.) Mortgage = $2000, Rent = $1500 ($500 loss)

When it comes to taxes, you would claim rental income as $1500 regardless of whether it is scenario a or b, correct (minus interest, deduction, etc)?

correct its still income. State won't pay you to buy stuff.

All rental income goes on schedule E like SFAce said. If you're going to be a landlord/investor you need to get the nolo press book titled "Every landlords tax deduction guide" which will explain all of the deductions, etc. in great detail, and if you're a landlord even the various books are tax deductible. Nolo puts out very good publications. You can find them here https://www.nolo.com/products/nolos-landlord-bundle-LLBUN.html

One related question: let's say you have to leave your home city for a job somewhere else, where you'll be renting for a year. If you own your home and rent it out for, say, $1000 per month while you're away, and you're paying $900 per month for your rental in your new city, do you owe tax on $1000 or $100?

Would it be some form of tax fraud if the person renting from you (Person B) simply paid the person renting *to* you (Person C), in your new city, directly? That is, the consideration you're receiving for your original home is that the renter pays Person C $900 per month. The money never goes through your hands. Still taxable?

Michinaga says

If you own your home and rent it out for, say, $1000 per month while you're away, and you're paying $900 per month for your rental in your new city, do you owe tax on $1000 or $100?

From what everyone is saying, your declared tax income would be $1000 in this situation. You renting another place from another landlord has no baring on your rental in terms of taxes, at least that is the way I understand it.

BayArea says

Michinaga says

If you own your home and rent it out for, say, $1000 per month while you're away, and you're paying $900 per month for your rental in your new city, do you owe tax on $1000 or $100?

From what everyone is saying, your declared tax income would be $1000 in this situation. You renting another place from another landlord has no baring on your rental in terms of taxes, at least that is the way I understand it.

But the previous comments are about getting a mortgage while renting your first home to someone else. I'm asking about renting something while someone rents your home. If your renter directly pays the person who owns the home you're living in, and you never see any money, do you have any income?

Michinaga says

BayArea says

Michinaga says
If you own your home and rent it out for, say, $1000 per month while you're away, and you're paying $900 per month for your rental in your new city, do you owe tax on $1000 or $100?
From what everyone is saying, your declared tax income would be $1000 in this situation. You renting another place from another landlord has no baring on your rental in terms of taxes, at least that is the way I understand it.
But the previous comments are about getting a mortgage while renting your first home to someone else. I'm asking about renting something while someone rents your home. If your renter directly pays the person who owns the home you're living in, and you never see any money, do you have any income?

Yes, I believe the auditor would ding you for that. Otherwise, EVERYONE would be pulling this sort of "pass my income to my expenses directly" scheme.

BayArea says

Thanks for the reply everyone. Let's take two scenarios (I'm ignoring property tax, depreciation expenses, etc for simplicity)
a.) Mortgage = $1000, Rent = $1500 ($500 profit)
b.) Mortgage = $2000, Rent = $1500 ($500 loss)
When it comes to taxes, you would claim rental income as $1500 regardless of whether it is scenario a or b, correct (minus interest, deduction, etc)?

1,500 is income for schedule E purpose, not income on the front of the 1040. Expenses are line 5 - 19. Income less deductions are taxable income which goes on page 1 income section of the return. There's some caveat on passive/non-passive and loss limitations.

Michinaga says

One related question: let's say you have to leave your home city for a job somewhere else, where you'll be renting for a year. If you own your home and rent it out for, say, $1000 per month while you're away, and you're paying $900 per month for your rental in your new city, do you owe tax on $1000 or $100?

Depends on the timing of that one year. But the general treatment is since you are renting your property and collecting income, you have to report $1,000 on schedule E, but is then eligibable for deductions like above. There is no netting.

Michinaga says

Would it be some form of tax fraud if the person renting from you (Person B) simply paid the person renting *to* you (Person C), in your new city, directly? That is, the consideration you're receiving for your original home is that the renter pays Person C $900 per month. The money never goes through your hands. Still taxable?

The substance remains the same, you receive income while you pay rent. Although such steps should not be neccessary as no one reports form 1099 to the IRS anyway. Most individuals are audited at the computer/matching level. If they would somehow audit you, they'll find out what is really going on anyway. There is a dollar element to fraud as a 10K tax bill will never make it to that level in practice.