How much $ can I expect after claiming renovations?

Question

Hello BP! I'm seeking input from a CPA or tax professional that might be able to help me regarding claiming expenses on an investment property. I'd like to know how much I can expect to receive back from taxes after claiming a number of expenses. Is there a formula? Is the actual amount received based on where one falls in the federal tax bracket?

For example, if someone were to put $10K towards renovations, etc., how much of that $10K will that individual receive back from the government? I've not been able to find the specific formula in my research and am hopeful that someone within this great community can shed some light on this topic.

Thank you in advance!

Michael Plaks · Answer

Somehow our previous answers to your question, Hannah, which was a variation of this one, did not break through. A+ for persistence.There is no such formula. It cannot be produced. Because the tax rules are unfortunately extremely convoluted. You want simplicity and some hack to "calculate" tax savings. It cannot be done, save for the simplest of tax scenarios. And tax treatment of renovations on properties is the opposite of simple.After the holidays, I'm planning to write a long post illustrating why taxes are so difficult to estimate. It won't help you accomplish what you want. It will merely highlight the futility of the task.

Jeff Nash · Answer

As you probably know, your effective tax rate differs from your marginal rate. There are several considerations as @David M. addressed, but a rule of thumb is to consider your Federal marginal tax bracket as well as your applicable state tax rate and multiply that by the deduction to estimate your tax savings.  I emphasize estimate. There are bracket breakpoints at various income thresholds and I usually just run the numbers in tax software to precisely quantify various planning “what ifs”.

Chris Gallick · Answer

Hi @Julio GonzalezThe only CPA's I've spoken with are via Turbo Tax. Unfortunately, they have been hit or miss. I would be happy to receive a recommendation. Thank you!

Michael Plaks · Answer

Of course they are hit or miss. They are general practitioners, not specializing in real estate. Also, if they have time to part-time for Intuit and accept their skimpy pay rate, you can safely conclude they are not the top tier.

You're on a forum that features 20+ tax experts who specialize in real estate. Browse the forum, select some tax pros who you like and contact them privately.

Nate Meeker · Answer

@Chris Gallick - As you have read, there is no formula, but a good tax professional that knows your exact situation should be able to get you an estimate within a few thousand dollars. I say a few, because most clients aren't good at estimating, and they always forget about some other stock sale they had or a bonus they will get at year end.

David M. · Answer

@Chris Gallick

Well, I'm not a cpa or tax professional (which of course you should probably consult..), but there is no clear way, not from your post, to determine how much of the deduction you can realize...

ASSSUMING you are asking about having expenses on long term rental property, you would take the renovation expenses either as immediate losses/deductions, one way or another, or as capital impreovements in which case it would be depreciated over time.

But this is all in the "passive income" bucket...  So.. if you have net rental income that you are paying tax on, then these expenses would offset that rental income.  That saves you against your ordinary rate (for federal purposes and I guess for CA purposes).  After that, you cannot ordinarily 'realize' the additional losses.  They are carried forward year over year as Passive Allowed Losses.  You may already be doing that.  In this case, having additional expenses won't adjust your taxable income for that year.

(Its really the same thing as having carryover losses with capital gains/losses)

REAL BRIEFLY (since we have many whole threads on this) In trying to realize these PAL sooner, you get into the $25k for material participation if your income is less than $100k (and phases out by $150k) or if you qualify for the IRS' Real Estate Professional Status (which the name is somewhat of a misnomer) then you can realize the PAL on your main 1040 form (it doesn't change the characterization of the income, however).

Anyway, hope this helps.  Be happy to chat if you'd like.  Good luck.

Chris Gallick · Answer

Hi @Hannah Joy

I wouldn't say that there's necessarily a way to 'plan' your deductions. Rather, you just want to make sure you include all relevant expenses, depreciation, or other 'losses' associated with your property in order to get the maximum tax benefit of owning a rental. There is bonus depreciation that can be considered, however, which could allow you to maximize your refund by claiming future depreciation of an asset in the current year. As found on usbank.com ..."The rules allow Bonus Depreciation to 100% for all qualified purchases made between September 27, 2017 and January 1, 2023. Bonus Depreciation now ramps down to 80%, starting in 2023. Bonus depreciation will continue to ramp down for ensuing years: 60% for 2024, 40% for 2025, 20% for 2026, and 0% beginning in 2027."

I believe you are correct in that Turbo Tax won't let you play around with entering the numbers until sometime early next year. I'm not sure when that date is, however.

Hannah Joy · Answer

It sounds like the answer is, it is possible to get a projected estimate but it really requires a CPA to work through the projections because of all the layers of complication. I guess I could work through it on my own in Turbo Tax to play around with potential outcomes, although I don't think they let you do that until a certain time of year.

Nicholas L. · Answer

@Hannah Joy

it's not that simple.  if you have a W2, and you own rentals, you can use any losses from those rentals to offset the taxes on your W2 income.  but how much it reduces is complicated because it depends on your income, your tax bracket, etc.

How much $ can I expect after claiming renovations?

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