Tax on rental property capital gains

[Nar Rav]

Hi,

I brought a rental property in California under company A (paid in full). Suppose, I‘m getting $12, 000/year ($2k/month) after deducting all taxes and expenses. I want to buy another rental property in California with 15 year loan. I want to pay the monthly EMI using another rental house’s monthly rent + first property’s profits ($2k/month) .

My questions are

1. To pay first property gains ($2k/month) to other property monthly EMI, both properties should be on same companies name or both should be on two different companies or both companies should have a common parent company?

2. I’m using first property gains to pay another property monthly EMI, can I consider these payments as expenses on first property ?

Thank you very much for your inputs.

[Michael Plaks]

@Nar Rav

You're rather confused in using terms (there're no capital gains in your example - capital gains is when you sell a property) and numbers ($12k/yr is not $2k/mo).

I'll try to answer, but I'm not 100% sure that I really understand your questions.

- When you have cash flow from rentals (like that $2k/mo), you incur taxes on that cash flow regardless of what you do with the money: keep it in the company, use it to pay for another property or blow it in Vegas. Same tax either way.

- Taxes are not really on the cash flow. The real calculation is different and involves depreciation, but it's another conversation. In short, you will owe less taxes than if the entire $2k/mo cash flow was taxed.

- Companies (and I assume you're talking about LLCs) do not matter for taxes in most cases, because you end up reporting everything on your personal tax return and paying taxes personally.

- Mortgage interest is a deductible expense. Mortgage principal is not. So, only part of your mortgage payments will be deductible against the new property.

- It does not matter where the money to pay this mortgage came from: from another property's cash flow, from your savings, from your credit card or anything else. Same result either way: interest portion is deductible.