How to manage taxes on first rental

Question

I was approved to buy a second house to live in so that I can rent out where I currently live. I am going to try and rent the house I currently live in for $1700 a month and my monthly payment is $1321. I am new and trying to figure out costs for the rental and the biggest question I have is will I have to pay income tax on the rent? I plan on forming and LLC and letting the cash flow build up, so that I can save for future expenses. Any direction or resource would be greatly appreciated!

**the $1321 includes my current escrow account with property tax and homeowners insurance.

Ahad Ali · Answer

You definitely have to report the rental income on your tax returns and pay taxes on it accordingly to how much profit you had for the year. However, there are a slew of expenses you could use to lower the profit even potentially yielding a loss depending on your expenses. Please speak with an accountant/CPA who has experience working preparing returns focusing around rental income.

Steve Archer · Answer

you have to pay taxes on profit. However if you are paying a lot of taxes in this game you doing something wrong. Depreciation, mortgage interest, repairs etc. are all deducted against income.

John Alosio · Answer

You will most certainly have to claim rental income. Just keep track of ever penny that you spend on the house once you put it into service as a rental (i.e. who pays water, sewer?). I would recommend seeing an accountant for further guidance.

How much equity do you have in the old property? If you have over 20% it may be advantageous to open up a HELOC Just to have a safety net in case of major repairs. just to hold you over until you can build up a decent cash reserve. Just food for thought since you mentioned you're concern about future expenses.

TIP: open the HELOC now while it is still your primary residence. It Will be much more difficult to find a lender to do a HELOC as an investment property.

cheers

Bill Hampton · Answer

Anthony,

You will pay taxes on any profit after deducting all expenses. Many investors show a paper loss after all expenses are deducted.

I recommend hiring an accountant that specializes in real estate taxation to ensure you get every deduction you're entitled to and to reduce your taxes.

Good luck and let me know if you have any questions.

Basit Siddiqi · Answer

@Anthony JonesYou want to see if your 1st home that was a primary residence is eligible for 121 exclusion. if it is, you may want to consider taking advantage of it.Regarding rental properties - they need to be reported on your tax return. You may want to consider connecting with a CPA to help you make sure you are taking advantage of all your eligible deductions.

How to manage taxes on first rental

How to manage taxes on first rental

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