Taxes

[Walker Seid]

Lets say I rent a house out for $1200/month. My mortgage is $560. Expenses are (taxes $150, HOA $30, Ins $25) $205/month. Do I pay taxes on $1200 or just $435?

[Jon Holdman]

Taxable income is the rent received, less all expenses.  

Only the interest part of your payment is deductible, not the principal.  This of the principal as a transfer, not a outgoing cash.   So, say your payment breaks down as $500 to interest and $60 to principal.  You can deduct the $500.

You can also deduct depreciation.  Say the house was $100K and you use the 80/20 rule of thumb that the land is worth $20K and the improvements are worth $80K.  Residential real estate is subject to 27.5 years depreciation.  So that works out to $80K/27.5/12 to $242 a month. 

So your total deductions are:

interest: $500

depreciation: $242

property taxes: $150

HOA: $30

insurance: $25

total:  $947

With $1200 in rent that leaves $253 in taxable income.

Do keep in mind a couple of things.

One is that as you take depreciation (or are allowed to take it if for some reason you don't) the basis in your property decrease by that amount.  That means when you sell the gains are larger than you might think.  And the gains, up to the amount of depreciation taken or allowed (whichever is greater) are subject to a tax on unrecaptured depreciation, currently 25%.

Second is that you will have many other expenses such as routine maintenance, legal fees, CPA fees, HOA special assessments, tenant damage, etc. And you will have some vacancy which reduces the rent you receive.