calculating rental income
As a prospective buyer of a two family, I’m trying to figure out how to estimate after-tax income on a rental unit. For example, if the market rate for the rental unit is $2000, what percentage of that can I expect to pocket(assuming I’m in the top tax bracket)? I know this depends on a…
As a prospective buyer of a two family, I’m trying to figure out how to estimate after-tax income on a rental unit. For example, if the market rate for the rental unit is $2000, what percentage of that can I expect to pocket(assuming I’m in the top tax bracket)? I know this depends on a number of variables, but I am wondering if there is a rough formula for estimating, or whether people can share their own experiences. Thanks in advance!
Having a renter is great tax writeoff.
End up showing big loss every year.
So much of your expenses get ‘attributed’ to expenses of rental unit.
When you sell a rental property try to do a 1031.
Look up 1031.org and it explains everything.
Listen to Daveinbedstuy. Also, other expenses can be apportioned so that they count against the rental income. Your insurance, water bill, etc. The cost of any repairs you make. Is the heat on your gas or electric bill? Apportion that, too. You may want to work worth your accoutnant on the right apportionment, because if you are deducting a portion of the mortgage against the rental income, that amount is not available for your overall mortgage deduction. There is a bit of flexibility on houw you apportion costs, because you have to account for land value, shared space, etc. And, if you are renovating first, you will have those costs to apportion and depreciate as well.
11:30 poster is correct. However, assuming you will have a mortgage, 1/3 of that will go to the unit and you’ll run an accounting loss. There will be a cash gain because the depreciation is not a cash outlay.
That accounting loss cannot be taken against your income if you make more than $150,000 at your real job. Depending when you sell the property, you will have a big accounting loss to take against your income that year (or a gain if you keep it for the 27 years of depreciation) This is where you really need to sit down with an accountant to have him explain this.
At the time of sale you will pay a capital gains tax on the apartment 1/3 of the building based on sales price minus cost less amount depreciated.
As a practical matter: Typically you depreciate the portion of the building that is occupied by the tenant — this depreciates over something like 25-30 years– I’m too lazy to look it up.
This often means that your entire rent roll passes through directly without taxes. The flip side of this is that when you sell the building, you have to pay 25 or 28% tax on the accumulated depreciation (assuming you sell the building for more money).
So your P&L looks as follows (Assume a
Portion of building rented=33%
Value of building 1.5 MM
Value of apt rented =.5MM
Rent: 2000
Annual rent 22000 (some vacancy, renovations, etc)
Annual Expenses related to apartment (heat, etc): 5000
Gross income: 17000
Annual Depreciation: 16,666
Pre-Tax income : 334
Less income taxes: ~200
So for most newly purchased properties, your taxable income won’t be affected by the tenants (in fact, you’ll generate losses, which can be stored for future years).
When you sell the building, you’ll take a huge hit, however.
Try for 5-8% after expenses.
Hey 5:54, the OP is a “prospective” buyer, not an owner already. He’s trying to get a general idea of the net income he’ll get from a rental unit before he buys. It’s a good question to ask.
wow, 5:54 is a deek
Call your accountant. This is their job. If you’re in the top tax bracket and if you plan on running a business (which being a landlord is) you need a tax professional. Get one, ask them to do their job and pay them accordingly.