$100k rental income vs $100k earned income taxes?!

[Edmondo Morgan Jr]

Looking to understand how one is able to pay less tax via rental income and at the same time keeping more at the end. Thanks in advance!

[Natalie Kolodij]

It's compounded benefits. 

The big one is no payroll taxes- so if you were self employed vs. owning rentals you're already saving 15% direct off the top in taxes. 

Or if you're looking to replace your take home wages with rental income you need to take home 7% less because you're not paying that tax on it. 

The other benefit is depreciation- it's a deduction you get to take, without any cash outflow. 

So ideally at the end of the year your bank account for your rental has $5k sitting in it, but say your depreciation is $5k...now you pay $0 in taxes on that $5k. 

Now imagine you have 10 rentals that are making you $5k annually. 

At the end of the year you made $50k and pay $0. 

If you made $50k at a job your take home would be reduced by income and payroll taxes so you'd really have to earn substantially more, to take home the same $50k.