Rental income tax rate?

Question

How much of my rental income should I set aside for taxes? I'm almost finished reading The Book On Rental Property Investing and it still hasn't mentioned any guidelines about how much tax to set aside? Maybe I missed it... Any suggestions?

Andy D. · Answer

@Bryan Otteson and @Jeff B. have said it pretty much all. But of course the devil's in the details especially with "all your other expenses" as @Natalie Kolodij wrote. Because here some people might be very mistaken in, for instance,  believing that their entire mortgage payment is a "cost". Now while this is only relevant for those with a mortgage (compared to those who bought all cash), I guess that'll be the majority of investors here. I thought I mention that since the questions from OP imply that he might not be too familiar with the whole "tax thing". :-)

Therefore: make sure you have a (good!) CPA who tells you what to do, especially for a) the first year, b) the year in which you bought something (e.g. because of different depreciation figures) and c) when you sell something. Oh, and CPA fees are a deductible cost in this situation. ;-)

Tom S. · Answer

For your federal at least, $50k less 7k, less 5k, less $10k = $28k that would then get grouped in with any other income.  Depending on that, it would dump you into a higher category, or if there's no other income, you might not get taxed at all (depending on your other numbers, deductions, exemptions etc).

The rental income is not considered capital gains, it's income that comes in on Sch E of your return.  Once you sell the place, that would be capital gains.

States sometimes ignore depreciation, I can't comment on NJ.  A quick phone call to your tax guy should give you a better answer.  I personally think using a CPA instead of tax software is worth the investment.  There are a lot of gray areas in the code and wiggle room to deduct more or less.

Jeff B. · Answer

Rental income is declared on the 1040 Schedule E form with all the related expenses.  The number at the bottom of the page is carried over to the 1040 Line 17, which is above the Adjusted Gross income box (line 37).  This implies that the RE income contributes to your total taxable income(line 22) and will be taxed at your person tiered tax rate.

Bryan O. · Answer

Probably none of it, but you'll want to talk to your CPA to be sure. You are taxed on the income, part of that pays principal from the loan, and part of that goes into your pocket. You'll have some maintenance over the year, but then you'll get depreciation that should be close to making it all a wash.

You'll want to look at the specifics of your property (high maintenance? low maintenance?), your own income and tax bracket, and go from there.

Rental property is absolutely amazing for taxes. Best of luck and happy investing.

Natalie Kolodij · Answer

You should be able to run a quick and dirty estimate of what your taxable income will be

Depreciation= your home's basis over 27.5 years...so..one year of that as an expense. (just the house, not the land)

All your other expenses

Deduct that from Rents collected

Then add that amount to your W-2 and other Adjusted income.

Jake Wa · Answer

Thanks, Bryan.  So you are saying that with deductions rental income is basically becomes tax free?

Drew Slew · Answer

ok, can someone then take this further? NJ is around 20% tax as rental income is considered capital gains?

Lets take example 50k rental income for 12 months,

property 7k taxes,

lets say 5k expenses incurred (roof redone, plumbing, cleaner, pest control, washer dryer bought, fridge bought etc - not really sure what qualifies as expense or not)

and depreciation is? (property price divided by 27.5?) lets say 10k?

So then tax would be 50k*20%=10k-7k-5k-10k= negative, so no tax to pay at all?

Jake Wa · Answer

Thank you!

Jake Wa · Answer

Wow thank you both so much.

JD Martin · Answer

Not really, but it can take a big dent out of it. A lot of it depends on where you are in your stage of investment. If you are growing, you're almost guaranteed to have more deductions than income during those years. If you have bought and rehabbed everything, you'll have a lot less in deductions. Hence, you need to think through your entire strategy carefully to maximize tax value.

Rental income tax rate?

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