Federal and State Income Tax

[Javier Gaillard]

What is the tax rate -income tax- for renting property? Is there a State and Federal income tax? I know some states don't charge income tax on rentals, but you still have to pay the Federal income tax?

Can you get a better tax rate if you form an LLC?

[David M.]

@Javier Gaillard

Sounds like we need to start you out with reading this post here:

https://www.biggerpockets.com/...

Of course, consult a professional...

There is no tax/accounting benefit to taking Title of a property in a LLC. We have no shortage of discussion on LLC's on BP, pretty much daily. FYI: many investors don't use LLC's for single family rentals, just homeowner's/landlord insurance, umbrella insurance policy, and keep their properties in good repair.

To your question, state level income tax isn't discussed much because one would have to deal with, well, every State...  But, States GENERALLY follow the federal guidelines........

You need to understand that they are a few "categories" of income according to the IRS.  Your salary or wage is ordinary income.  Rental income is categorized as passive income.  This is handled on SchE which you can download the form and the instructions if you are interested.  The point is your rental income is offset/deducted by your various expenses (the categories are on SchE) that basically covers insurance, depreciation (1/27.5 of the improvements on the property, not land value), repairs, etc.

When it comes to taxation, the resulting profit/loss (many investors actually carry a loss because of the depreciation deduction, a non-cash deduction) is potentially carried onto your 1040 and taxed at your marginal rate.  For losses, there are a few conditions where you could only take $3k as a loss on your 1040, or up to $25k if your modified AGI is less than $100k and by $150k this is phased out.

whatever rental losses you may have that you cannot take on your 1040 are not "gone."  You carry them forward as Passive Activity Losses (PAL) which you can use to offset future profits.  

That's the somewhat longer version.  Consult a professional.  Good luck.