How is cash-flow from rental houses and apartments taxed?

Question

I live in Louisville, Ky, and I wondering what kind of taxes to expect on cash-flow from rental houses and apartments.

Basit Siddiqi · Answer

@Chris RandInvestors who have rental properties report their rental activities on schedule E.You report rental income less expenses(insurance, utilities, repairs, mortgage interest, real estate taxes, depreciation etc).The great thing about real estate is that you may have a cash-flow positive business but report a taxable loss thanks to depreciation.The difference between cash-flow and taxable rental income is that depreciation is factored into taxable rental income and principal payments are not a tax deduction.generally speaking cash flow - depreciation + principal payments = taxable rental income

Andrew Reyes · Answer

Hi Chris Rand , In general, the above posts are accurate. Rental income, like almost all income is taxable. I note that you asked specifically about “cash-flows”, which has multiple components each treated differently for tax purposes. In general, you can start with NOI, next you have debt service and cap ex, which can get you to cash-flows. The interest portion of your debt service is tax deductible (possible subject to limitations) and the principal portion is not because you get basis in the asset for the loan principal, which generates a depreciation deduction. Similarly, cap ex is generally not deductible currently but the expenditure is capitalized and depreciated, similar to the initial basis in the asset. In summary, you have cash and non-cash tax items that cause your taxable income to differ from your cash-flows and taxable income * tax rate determines your tax liability. Speak to a well informed tax profession in your area. Every person’s tax considerations differ so you would need to hire a well informed professional to get specific advice about your scenario. Best of luck!

Thomas S. · Answer

All income is taxed, based on your tax bracket, after all expense deductions. (Rental income - rental expenses) + all other income = taxable income.

Henri Meli · Answer

@Michael Plaks Good points. Depreciation better described here by Amanda Han. A powerful tool for all real estate investors. Note that when combining (asset appreciation + depreciation capture + 1031-exchange) makes real estate a very powerful tool for wealth creation that all real estate investors should be familiar with.@David Heath Were you referring to this when you mentioned the business entity impact on taxes?

John Acheson · Answer

Chris, that really depends on the entity and address/es. Generally cash-flow means that you are in business but it may depend on the city/county. If there are multiple properties in multiple states then you would have to file and pay or get a refund for income taxes to the IRS and any states with an income tax. Also, many states, counties, cities require filings for things like business licenses, fictitious names, revenues, etc. depending on the type of business and where it's located. If you would like me to do the research for you feel free to send me a message :)

Michael Plaks · Answer

@Chris RandThe problem is that you're not taxed on cash flow. You're taxed on "net taxable income" - which sounds just like another term for the same thing. Unfortunately, it's not the same thing.You can have positive cash flow but still show a loss for tax purposes - which is very common. You can also end up in an opposite situation: have no cash flow and yet have some taxable income. It is less common but certainly happens.@Andrew Reyes and @Basit Siddiqi mentioned various factors of why this is happening, and the short version is: it is weird and confusing, thanks to our overly complicated tax laws. You won't really know your situation until your tax return is prepared. To complicate it even more, take it to 3 accountants - and you will probably receive three different results. This is why it's very important to find a really good tax accountant specializing in real estate. BP is a great place to pick one of us.By the way - rental taxation does not depend on whether you set up a company, as erroneously suggested in one of the earlier comments.

David Heath · Answer

It depends on how you have things setup. If the rental is in your name or if you have created a company for the rental. You need to talk with an accountant to know what to do and how you will be taxed on the cash flow.

Carl Fischer · Answer

@Chris RandPretty much like W2 income except NO SS/MEDICARE