how to calculated expected tax savings with first property?

Question

How much tax savings can be expected with my first investment property? How can I do the calculations myself? I pay a lot in taxes in my W2 job, and would like to know how much can be offset.

Does the math change significantly if I were to house hack vs not?

Because this would be my first property, I won't be a real estate professional. I heard that making it a short term rental would help with tax savings, but I'm curious to know how much tax savings is to be expected without going the STR route.

Michelle Crochet · Answer

Hi @Woojin Joo! I agree with the replies. Here's some additional info :)

Calculating the tax savings from your first investment property can be a bit tricky, as there are many variables to consider. However, in general, owning an investment property can provide significant tax benefits.

Some potential tax benefits include:

-Deducting mortgage interest and property taxes: If you have a mortgage on your investment property, you can deduct the interest you pay on that mortgage from your taxable income. You can also deduct property taxes paid on the property.

-Depreciation: You can also depreciate the value of your investment property over time, which reduces your taxable income. This deduction is available even if your property is appreciating in value.

-Deducting expenses: You can also deduct expenses related to managing your investment property, such as repairs, maintenance, and property management fees.

-Capital gains tax: When you eventually sell your investment property, you may be able to take advantage of the lower capital gains tax rate.

The exact amount of tax savings you can expect will depend on a number of factors, including your income, the value of the property, and the amount of expenses you incur.

If you were to house hack, you may be able to take advantage of additional tax benefits, such as deducting a portion of your mortgage interest and property taxes as personal expenses.

To calculate the tax savings yourself, you may want to consider working with a tax professional who is knowledgeable about real estate investing. They can help you determine the tax benefits of owning an investment property, and help you maximize your deductions.

Hope this helps! :)

Ashish Acharya · Answer

If you are expecting to offset W2 with this investment, that is not going to happen.

Your tax saving is limited to not paying any taxes on the NET rental income.

If you want to offset W2 and save the taxes at the highest marginal tax bracket, you will have to be REPS with LTR or get an STR. Then, you have to follow many rules.

Ryan Thomson · Answer

Here is what I usually tell my house hack clients when it comes to taxes.

Investing in real estate can bring about a lot of financial benefits, but it can also have a major impact on your taxes. Here are some of my favorite tax strategies:

Qualified Business Income Deduction (QBID)

Qualified Business Income Deduction. If you’re a real estate investor, you could potentially deduct up to 20% of your rental income through QBID. This can help lower your taxable income and increase your overall profitability. You have to meet some criteria, but the first 20% of your income could be tax free.

Depreciation

This is a method of writing off the cost of your rental property over a period of time, 27.5 years for residential properties and 39 years for commercial properties. By taking advantage of depreciation, you can reduce your taxable income and keep more of your hard-earned profits.

Let’s break this down. Let’s say you buy a home for 300k. The land is worth 25k and the home is worth 275k. You are allowed to depreciate the cost you paid for the home (275k) over 27.5 years. 275k/27.5 = 10k. Each year you can use this depreciation to lower your taxable rental income by 10k.

If you were house hacking a duplex. You cannot depreciate your side of the unit. But you can depreciate the percentage of the square footage that is used as a rental. So at 50% of the duplex being a rental, you could reduce your taxable rental income by 5k/year (per the example above). You could also do this for bedroom rentals by taking the percentage of the bedroom rental square footage to the entire house.

Cost Segregation Study

“Cost Seg” if you want to sound cool while talking about taxes. Is that possible? This is a technique for breaking down the cost of your property into different components, such as the building structure, personal property, and land improvements. By doing this, you can accelerate the depreciation of your property and take advantage of bigger tax benefits. I bought a home for $260,000 in 2019. I just did a cost segregation study for 2022 and it will reduce my taxable income by 82k. It cost me $2,500.

As a real estate investor, it’s important to understand the various tax benefits available to you. Just remember, always consult with a tax professional for personalized advice and guidance.

Ryan Thomson · Answer

@Woojin Joo You should ask around for a CPA that works with real estate investors. They are worth every penny. I don't think you will be able to count losses in your real estate against your w2 job, unless you can get the "real estate professional" designation.

Most of those tax benefits only reduce the taxable income made by the property. The good thing is you can usually carry those losses forward.

Randall Alan · Answer

@Woojin Joo

You will be able to write off all of your mortgage interest, your property taxes, and depreciation of 3.3% of the purchase price of your house.    On top of that, any expenses you incurred such as repairs & maintenance, property insurance and such also are deducted.  This usually will eliminate the majority of your income from a financed property.  You may have a little.. but not much.

If you live in the house (house hack), you can only depreciate the investment side, not your personal side.

Here is an article on the topic:

https://homeguides.sfgate.com/...

I'll let others chip in from there... but those are the basics.

Randy

how to calculated expected tax savings with first property?

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