What percent of my cash flow should I set aside for the tax man?

Question

I live in San Diego, CA and am buying rentals in KC MO. I will soon have 4 rentals. I have about $320/mo positive cash flow on each after property tax, insurance and property management. Since this will be my first year what percentage should I set aside for the tax man to be sure I am covered?

One of my co-worker who dabbles in real estate said I should keep 80% set aside for taxes. This doesn't sound right to me but maybe I'm wrong. 50%, 40% maybe??? Any general rule of thumb on this?

Thanks, Joe

Natalie Kolodij · Answer

Hi Joe This $320 a month positive cash flow is before depreciation, mileage and multiple other deductions you can take against the rental income. On paper, you may not end up with taxable income- I'd suggest seeing a professional.This is where a good CPA is worth the cost- they will be able to make sure you're getting every deduction and mitigating tax as well as implementing a good strategy.

Account Closed · Answer

@Joe KoppelIf you have proper guidance from a CPA that understands real estate and the proper deductions. You should not owe any income tax on the properties. You can and probably will get a larger refund check if you are a w2 employee, due to the many deductions. There are some really good books written here by bigger pockets on the tax subject. Check them out. Best of luck!

Account Closed · Answer

If we're talking income taxes, the simple answer is what's your net taxable income and what's your effective rate of tax?Income taxes aren't due based on cash flow. They are based on net taxable income.If we're talking property taxes then go to the county assessor's office and look up with the property tax bill was in the prior year.

Stu Basham · Answer

Account Closed can you elaborate on some of the books you mentioned? Would love to read some. Thanks!

Ali L. · Answer

I agree with 30% max. Good news if you set aside too much you then have $$$ for next purchase ! Keep in high yeild money market account.

Lesley Resnick · Answer

The answer is not much! You did not include depreciation which is just under 3% a year. There are other expenses you could take as well.I am not an accountant but, my rough numbers: 320*4units= 1280*12months = $15,360 annual deprecation over 27.5 = .275 = 11,136 taxablein the 33% tax would owe = 3674 in tax for fedCalifornia is going to want their piece as well.

Christopher Cousin · Answer

@Joe Koppel The best thing for you to do is to seek the advice of a professional CPA as this is a difficult question to answer without knowing your financial situation. The income portion is fairly easy to estimate based on executed lease agreements and your (I assume) W2 wages, but a competent CPA can review your situation to ensure that you are taking advantage of every deduction available to you. Furthermore, the biggest benefit of working with a CPA is that they can help with tax planning and strategy as your portfolio grows. I wish you the best. PM me if you have any additional questions.

Joe Koppel · Answer

Hey Austin I'm going to email you...

Sastry Srini · Answer

Joe Koppel Your federal taxes depend on your net income ( total income- deductions). This depends on a lot of factors like your filing status ( single vs married filing jointly etc..) and whether you are taking itemized deductions or standard deductions, number of dependents etc.. In general, $320 per month gives you around $3840 annual gross. Assuming you are in 28% tax bracket, take 30% as a good approximation for your tax bill. Again, I am not a tax expert, that's what I would account for generally.

Austin Fruechting · Answer

Hey @Joe Koppel , glad to hear you found your next property! Your CPA would definitely be the best to know exactly, but here's a nutshell: $320/month cash flow For ease I'll say $180/month average paid to principle means $500 before other expenses. I'll assume a nice round $200 a month for depreciation (that would be building value $66,000). So you're at $300/month, $3,600/year per property taxable base. But you still get to back out other costs you incurred (closing, travel, research, etc). Back those out and you'll have a pretty good idea of what income you'll have to claim. You'll pay your income rate but subtract out social security/medicare (7.65% for W2)I would think that's going to be on the higher/safe side of additional taxes paid. I pay very little to no taxes after everything. A great CPA is worth every penny! **I am not a CPA. This is not tax advise**