Comparison of W-2 income to Rental Income

[Benjamin Allen]

Hi, I saw post mentioning that the rental income isn't taxed the same as W-2, I'm wondering how I can go about figuring out exactly how much positive cashflow I will need to equate my current income of 65k. I know rental income isn't responsible for paying medicare tax or SS tax. Does anyone know how I can break this down in order to figure the minimum amount of cash flow i need to replace my income, or does anyone know of a website I can do this. Also just as a side note, if right now I'm saving over 50% of my income doesn't this bod well for me not needing a higher amount of cash flow that what I make now? Thank you for anyone that is able to shed some light on this confusing subject I appreciate it. 

[Dave Holland]

Benjamin Allen

Yes as far as how W-2 income is taxed compared to rental income you are correct that you don't pay Social Security and Medicare.

For 2016 the rate is 7.65% for W-2 employees, it should be noted if you were self-employed it would be double that or 15.3% since the employer actually splits this tax with you.

So the simple answer is you can earn 7.65% less and still have the same take home income if you only had rental income as opposed to W-2 wages.

It's not really that simple though because as others have mentioned there is depreciation and other "on paper" expenses you have for tax purposes that don't impact your actual cash flow. You do also have to accurately forecast your expenses and capital expenditures because that too will impact your total rental income. If a toilet needs to be replaced at your employer it's not like your wages would be impacted, but if you have to replace a toilet at your rental it goes against your bottom line.

So if your goal is to replace your W-2 income you will want to really get to know what average maintenance is and also reserve for capital expenditures, vacancy, etc. because these things will happen.