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March 1, 2009
Rental tax of 6 family
Hi
I know that an excat answer will only be given to my by a CPA but I want to know in general-
Lets say I have a 6 family which I live in and rent the other 5 units. My expensses will be -
around 6500$ a month which includs the mortgage, pmi, proporty tax, water,gas and elec.
now. Let's say I earn from the rent 9000 a month. How much will I need to pay tax on that income?
Comments
Did you include depreciation as an expense??? Whatever is the income - expenses is what you will pay taxes on. The depreciation amounts to basically 5/6 of the all in cost of the property, depreciated over 26.5 years (I think...not sure exactly...my accountant does it)
Posted by: daveinbedstuy at March 1, 2009 10:24 AM
5/6 => 83.3%. Let's say building was $1Mil. Depreciation is 27.5 years so your depreciation expense would be about 36K/year or about 3000/month. Making your total expense 9500/month. Which means you'd actually be taking a $500/month loss. Thats 6000 a year you could write off against other ordinary income(ie W2 wages).
Answer..You'd probably pay zero income tax on the rental income. And might even see your overall tax burden decrease. This isn't even factoring in the mortgage deduction you get to itemize for the portion you use as your primary residence.(Unless you make over 250K or whatever the number is that Obama considers rich.)
Posted by: Colonel Steve Austin at March 1, 2009 1:24 PM
However, you can't claim a loss on a rental property if you make more than $150,000 in regular income. The losses continue to be carried until you sell the building or they start to offset income after the 26.5 years are up with the amortization.
Posted by: daveinbedstuy at March 1, 2009 10:36 PM
You have forgotten that you can only depreciate the building and not the land. Using your example of a $1 mm purchase, and you allocate 40% to land value (not really sure what the right allocation is), then your depreciable base is $600,000 * 5/6 / 27.5 = $18,181 per year. It will shelter a lot of the income, but necessarily 100% of it. Remember when you sell, you recapture the depreciation and pay 25% tax on that amount. And, as I recall, you have to take the depreciation each year -- you can't pass one year and not get hit with the recapture on that amount (that you should have taken).
Posted by: jonathan c at March 2, 2009 5:20 PM
A 6 family is considered a commercial property, form an LLC and run the building finances and expenses through that.
It'll help keep your personal employment income separate from that of the building.
Posted by: christopher at March 2, 2009 7:15 PM
you sure about that 25% tax rate? I thought was same as capital gain (longterm) which is 15%.
and is that $150,000 income tax limit for loss on rental property for all rental or just passive (whereas this case seems to be active management)?
and shjom: don't forget insurance and ever nickel you spend in maint., repairs, and supplies (paint, cleaning, etc) for building to add to your expenses.
Posted by: Petebklyn at March 3, 2009 3:42 PM
If your total modified adjusted gross income is $150,000 you are phased out of the "special allowance" of $25,000 for passive losses beyond your total rental income.
In other words, if you made $100,000 in rental income for the year, you are allowed up to $100,000 in losses (including depreciation expenses, mortgage interest, lawyers fees, advertisement, repairs, exterminators, etc., etc.} You are allowed an additional $25,000 in allowable losses if you actively participated in your investment property. That is, you weren't just part of an LLC or a REIT or other investment vehicle, but took part in making management decisions and/or the material upkeep of the property. The losses beyond the passive income limit can also be applied to "active income", such as your daytime job as a bike messenger.
WARNING though: The IRS has been making these deductions a "project issue" in recent years as many of the investors in real estate have been taking huge deductions beyond the passive income limits and applying the losses to "active income ", under the claim that they are real estate professionals (who are allowed to deduct passive income losses from active income as well, without limits).
Do yourself a favor and only deduct the amount up to the passive income limit and then the additional 25K, if you are not phased out by the $150,000 income cap.
Posted by: Legion at March 3, 2009 10:08 PM
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