Tax Benefits

[Felipe Ocampo]

What exactly are the tax benefits from buying a rental property? How much money should I expect in tax benefits/tax refund from my investment property? Is it a percentage of the interest rate paid? Are there any others? I am trying to get real world numbers. Thanks in advance!

[Jerry W.]

@Felipe Ocampo, I am not an accountant so these are just my best recollections.  When it comes to depreciation, the way I do it is to take the value of the whole property and subtract the land value.  If your property is worth $100K and the land is worth $10K then your amount you can depreciate is $90K.  I believe the depreciation on a building is like 29 years or thereabout.  So you get to deduct 1/29th of its value per year.  So say roughly $3K of your $90K building.  When you put in carpet or a water heater, you generally put those in and they increase the value of your property but since they have a shorted life span than the house you can often depreciate those on shorter terms.  There are tables to tell you what length of time you can claim depreciation.  Hopefully this helps you understand a little of how it works.  I am sure any accountant could explain it better.

Example, you buy a house for $100K, pay $20K down , finance $80K for 30 years at 5% interest.  Payments are about $430 per month.  Your taxes are $600 per year and your insurance is $600 per year.  You pay $1K for financing costs, you rent it out for 1K a month, and $500 to a plumber for repairs, and $500 to an electrician for repairs to wiring.  At end of year your income would look like this:

Rent income $12,000

Expenses

Repairs                     $1,000

Taxes                        $   600

Insurance                  $   600

Loan fees                  $1,000

Total costs                 $3,200

Mortgage expense    $5,160

Cash increase           $3,640

Your mortgage payment is NOT tax deductible, but your mortgage payments had about $4,000 of your payments be towards interest and about $1,400 towards principal, so you can deduct the $4,000 interest, and you get $3,000 in depreciation.  So you have $3,640 in the bank from your rental, your total income is $12,000.  For taxes you deduct everything but the mortgage payment so you have $8,800 taxable income.  Now deduct the $4,000 in interest and the $3,000 depreciation, you have $1,200 taxable income, but you have a $3,600 extra money sitting in your bank.  Does that help?