Underwhelmed with tax breaks of owning investment property

[Jeremy Rhodes]

I am doing my taxes myself via turbo tax and I must say I am underwhelmed with the tax breaks I am getting for owning a rental. My wife and I have strong W2 earnings at about 250k combined and it doesn’t appear that any flow through tax breaks are occurring due to owning a rental. We are unable to claim RE as a primary job for either of us with too much W2 earnings. Claiming depreciation doesn’t lower our personal tax situation either. I have looked into cost segregation but it seems like those losses also won’t be offset.

A little bit of background: we purchased our first rental in October of 2019 and have spent about $30k on the rehab of the property. No rent was collected in 2019 and it doesn’t seem like we will have a renter until some time in April 2020. Claiming these expenses as losses also has no effect on our bottom line.

Am I missing something? I planned on getting going with a CPA in the future but I was told that under 5 properties is doable for a landlord. Additionally if owning rentals isn’t going to help our total tax situation the way I envisioned when we went down this path, then maybe we can put off CPA help altogether since it appears we will be capped at achieving zero tax on our rental income.

[Linda Weygant]

I see this a lot with my clients - some get disheartened when they realize that the passive losses are not immediately deductible.  But here's how I would look at it.

First of all, even without your high income, 2019 wasn't going to be the awesome deductions that you thought it would be because those remodeling expensese are NOT a write-off.  Instead they get added to the basis and depreciated over the life of the property.  So the first issue in your disappointment was not talking to a tax pro BEFORE you went down this path because they could have set your expectations appropriately for year 1.

Going forward, as your property cash flows, you'll start seeing the benefits.  Not on your tax return.  But in your pocket.

Here's how it all flows together.

Your property will start cashflowing and that will be good.  And I know when you originally entered real estate investment, you thought that you'd tax breaks from it too.  And you do.  Kind of.

Because here's the thing... if your depreciation expense gets you to a paper loss (and it probably will), you have all that cash flow - tax free.  I know, not the write off against your other income you thought you would get, but it's still good to have the cash flow coming in tax free.

But the real rewards come in the future.  Each year when you have losses that you can't take, they aren't lost forever.  They accumulate and never get lost.  Then, one day, one of the following will happen:

1.  You'll have a year where you no longer have rental losses.  Maybe it's because you've paid off the mortgage (or paid it down significantly).  Whatever the reason.  That year will come.

2.  Your income decreased down below the $150,000 mark.  Maybe it's when you retire.  Maybe it's a year when something happens with your job or your health.  But it will likely come some day.

3. You sell the property.

When that year comes, it's like magic.

If you have a net profit, those accumulated losses will match against that profit and bring it back down to zero.  So still more cash flow without paying tax!

If you sell the property, you may have a huge gain.  But then those prior year losses come in and they are unlocked, no matter how high your income is, and you can sometimes make a lot of your tax exposure on the gain disappear with those prior year losses.

It's not the bummer you're currently thinking it is.  Understand how it all comes together both now and in the future to get a full understanding of the benefits.

Real estate is a Get Rich Slowly game.  If you're disillusioned because you didn't get instant riches, then rental properties may not be for you.  But wait to make that decision when you're fully knowledgeable in how it works.