Newbie tax benefits question

[Adam Berlinberg]

I'm new into the world of real estate and close to getting my first rental property. I'm still confused on tax benefits and looking for some assistance. I'm a high earning W2 household ($400k), and I also have around $75k 1099 income annually. Say I get a SFH that cash flows $200-300 a month, what are the tax benefits? How does depreciation and expenses (mortgage interest, property manager, etc) help? It's not against W2 or 1099 income in this scenario? Purely against the passive $2500ish a year net cash flow to zero it out? Thanks

[David M.]

@Adam Berlinberg

(one typo I saw above:  residential property is depreciated over 27.5 years, not 29.5.  To be clear, its just the improvement portion of the property value as land cannot be depreciated).

Of course, consult a qualified professional or two...

Yes, as you've come to realize that real estate investing does not help save taxes against your high W2 income.  The tax benefits that you've probably heard about is different.  The depreciation, a non-cash deduction, helps "shield" that positive cashflow.  Yes, since you have to take depreciation its a "lemonade out of lemons" story in my opinion since you still have to pay it back later.  Realize that this "paper loss" is carried over for as long as you hold the property or until you generate more profit / cash flow.

Also, you are able to full deduct the interest payments.  On a primary house, you would have to go through itemized deductions.  Meanwhile, you are paying down the mortgage with really the rent, not your own cash (i.e. the power of leverage).

The point is you potentially can realize a huge tax free gain when you sell.  The amortization is tax free and long term capital gains from appreciation are generally taxed at a lower rate than your marginal rate.  

Not sure what are your goals or your thoughts towards REI, but this thread might be interesting to you: https://www.biggerpockets.com/forums/48/topics/1131066-cash-...

Good luck.