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Updated about 12 years ago on . Most recent reply

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Matt M.
  • Orchard Park, NY
1
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If I live-in my triplex, do I have to pay taxes on rental income earned?

Matt M.
  • Orchard Park, NY
Posted

To my understanding, actually living in the premises, especially being a 3-home or less, will put you into a different mortgage bracket, tax bracket, etc...

Do I need to claim my rental incomes and then pay taxes on them at the end of the year?

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Jon Holdman
  • Rental Property Investor
  • Mercer Island, WA
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Jon Holdman
  • Rental Property Investor
  • Mercer Island, WA
ModeratorReplied

Depreciation is based on the value of the property. A common rule of thumb is that 80% of the price you pay is the "improvements" and 20% is that land. You take depreciation on the improvements, but not on the land. Improvements are depreciated over 27.5 years. So you take the value of the improvements and divide by 27.5 to get the annual depreciation.

Now, the first year you own is probably not a full year. Depreciation starts when its rent ready. If that's Jan 1, you get a full year's depreciation. If its, say, July 1, you can only take a half year depreciation.

Now, a better method to calculate the value of the improvements is to look at the county assessors valuation. They will have an amount for the land and an amount for the improvements. Use those to compute the ratio and use that instead of the standard 80%. Don't use their values, just the ratio. That is (assessor's value for the improvements / assessor's total value.)

Most rentals don't produce a lot of taxable income. Many are actually negative. If the net taxable income is positive, you will pay tax on it at your marginal rate. Its EXACTLY the same as if you received that amount as a raise at your day job. So, the amount of tax depends on your current AGI. You can find your AGI on your previous year 1040EZ. Then google "2012 tax brackets" and figure out your rate.

If the net taxable income is negative, you may be able to use that passive loss to offset some of your ordinary income. If your AGI (married or single, doesn't matter) is under $100K, you can reduce your other income by the passive loss, up to $25,000. If its over $150K, you cannot. In between, that $25,000 limit is reduced by $1 for every $2 of income in your AGI over $100K.

You're not going to make $15,000 in NET rental income. You may collect $15,000 in gross rents, but after you subtract taxes, interest, insurance, maintenance, tenant screening fees, your CPAs fee (yes, that's deductible, at least in part), utilities, etc., etc., etc and then you subtract the depreciation (which is not actually money out of your pocket), the NET rental income will be much less.

You said "Your talking a little over my head here in terminology". Understand. This stuff is complicated. That's why you MUST get a CPA who's experienced in real estate investing. Especially the first year. The initial expenses and purchase transaction are especially complex. You living it in makes it complex, both now and in the future. This is just not a DIY project.

You initially said your friend was a VP of finance at a corporation. That means he's knowledgeable about doing the accounting for a company. That's not the same as doing any particular form of investing.

Then you said he owns a brokerage. Real estate brokerage? OK, that's better. But in all honestly, I've ran across MANY brokers, perhaps even MOST real estate brokers, who really don't have a clue about real estate investing. A broker's job is to facilitate real estate transactions. An investors job is to buy rentals that will make a profit. A broker is perfectly happy to sell an investor a $200K house that rents for $1000. They collect a commission and move onto the next deal. I've seen many brokers write "this cash flows" in the MLS remarks. What they mean is "if you put 20% down, your rent will be just a tiny bit more than your PITI payment". That's not "cash flow". That's a loser. An investor is going to losing big-time on a rental like my example.

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