How to estimate income tax for rentals?

Question

Does anyone have any good resources, tips, or ideas on how to roughly calculate/estimate income tax on rental properties?

I'm in the process of hopefully buying a rental very soon and while I have everything estimated for the property, the last little bit is the income tax situation - which honestly, I'm a bit lost. I did some googling around and had some ideas but I figured to see more "real" numbers from others, examples, resources you used, etc.

I understand that it can depend on a lot of different factors but I'm just trying to wrap my head around this and factor this number into my calculations. I'm considering putting it in an LLC rather than my personal name but I'm still trying review the pros/cons there too. Plus, I see a lot about the possible tax deductions too which a whole other discussion probably...

Thanks!

Brian Dudash · Answer

@Mark S. @Anthony Wick I'm just going to throw this out there but I know in the end I may need to end up speaking with a tax accountant in more depth, anyways here it goes:

With all of the possible deductions that I've been reading on and the examples some of the supplied, I'm still not clear on how to "roughly" calculate my expected taxable income from a prospective rental I'm currently looking at. The problem is it's a SFH that is not currently being rented so I cannot ask for any prior financials to help my estimation, however, based on the real property taxes, insurance, and est mortgage payments I have the followings scenario:

Purchase Price: $100,000

Total Value: $92,930

Building Value: $62,380 (based on the County Auditor's website)

Expected Rent: $1,150/month or $13,800/year

Est Mortgage: $4,765/yr (est interest for 1st year: $3,420)

Home Insurance: $650/yr

Property Tax: $2,850/yr

Repairs (10%): $1,380/yr

Vacancy (8%): $1,100/yr

CapEx (5%): $720/yr

(I plan on having the tenants pay all utilities)

Regarding the taxable income part - for the depreciation (assuming 1 full year), I was able to come up with the following, if I read the examples correctly:

$2,439 (100,000 * .671 = $67,100 * .03636 = $2,449)

After that is where I'm confused. Since I only have the estimated repairs (10%), vacancy (8%), etc how would you estimate your taxable income based on the gross rental of $13,800? Then on top of the other deductions such as mortgage interest, repairs/maintenance, legal/pro fees, travel, etc - I'm trying to get as close as a number as I possibly can but I know every rental will be different based on variety of factors.

Even if I take the numbers that I have in full, is this calculation "formula" correct?

$13,800 (Gross Rent) - $2,449 (Depreciation) - $3,420 (Mortgage Int) - $2,850 (Property Tax) - $1,380 (Repairs) = $3,701 which is the taxable income?

Then take that taxable income of $3,701 and multiply that by your appropriate tax bracket %?

Account Closed · Answer

Hire an accountant

Dustin Awtrey · Answer

@Brian Dudash  I wondered this same thing when I first started and what I did was use turbo tax, just create a new account and choose the product and go through all the steps entering in all your info and at the end it will tell you what kind of refund you'll be getting or what you owe, just dont pay or file your hypothetical tax return.

Kory Reynolds · Answer

What you have here is likely a good baseline. You'll of course need to factor in other costs (ie mileage, other incidentals, supplies, repairs, etc) but what you put together certainly will be in the ballpark assuming no vacancy or capex occurs in the year

Brian Dudash · Answer

Thanks everyone for their input! Just like most ppl said here (and what I've read elsewhere too), is that it's not uncommon to either be at a loss or to have a very, very minimal amount. Makes me feel a bit better moving forward and I'll see what my "real" numbers are once it comes this time next year :)

John Morgan · Answer

@Brian Dudash

I bet you won’t owe any taxes on that based off those numbers. By the time you add up depreciation, property taxes, mortgage interest, insurance and random maintenance expenses, you’ll most likely be showing a loss for tax purposes..thanks to depreciation. I use turbo tax for my 9 rentals. It’s super easy to do with them. Just fill in the questions and keep track of your expenses. Good luck!

Anthony Wick · Answer

@Brian Dudash .  Yes,  yes, yes. If my old eyes could see my phone better, I would have read "income tax", instead of my brain thinking "property tax". So, basically, my entire answer wasn't even addressing your actual question!! And, I see others have answered your question, so, that is good. Lol.

Mark S. · Answer

@Brian Dudash With expenses and depreciation you may not have any taxable income unless your cash flow is strong enough to exceed that.

Brian Dudash · Answer

Thanks everyone for their input! I'll need to do a little more digging into this and go from there.

Eamonn McElroy · Answer

@Brian Dudash

In a nutshell:

Ordinary income.

Passive activity loss rules add a few wrinkles.  If you're a high earner and can't qualify yourself or your spouse as an RE professional, you may have Net Investment Income Tax (NIIT) exposure if you're in a net taxable income position from the rentals.

How to estimate income tax for rentals?

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