All Forum Posts by: Abi Wegman

Are you self managing this property?

@Andrey Y. Correct. You aggregate all of your passive activity into one line. So if one of your properties is showing a tax loss (because of depreciation, etc.), it can offset another one that is showing income. Any excess loss can be applied to the income next year as well, which is pretty nifty.

With your effective rate hovering around 10-12%, it is most likely that you've just been withholding too much tax from your paychecks, and that's why you're getting some back.

 From what I'm reading, this is only for selling a property at a loss; not operational losses. If you buy your house for $100k, and sell it for $75k, you can write-off $3,000 of that loss. That's for investments only - not your primary.

Source: https://finance.zacks.com/can-claim-loss-sale-investment-property-1061.html 

@Jai ReddyI believe you're right. Unless you are paying estimated tax payments throughout the year based on your real estate earnings, there's nothing for them to actually refund you. Remember, a tax refund is the IRS giving you BACK the money you already gave to them, because you overpaid throughout the year.

@Andrey Y. Your RE losses are not offsetting your W2 income unless you're qualified as an active real estate professional. The requirements for this were explained earlier in the thread. You may want to consult a CPA. It'd be a shame if you were completing your tax return incorrectly.

Your profile says you're making $250k from your W2. You should not be paying $100k in taxes like you said in the first post, more like $70-$75k. If you are paying that much, there's the source of your return.

@Tony Lee Passive activity losses can offset passive income (until your net taxable passive income is $0), and any excess can be carried forward to the next taxable year (and the next, and the next, if they're large enough losses).

Disclaimer: I am NOT a CPA, but I did study accounting and tax in college

Many (most?) business keep two sets of accounting records. One for taxes, and one for investors/banks/executives/etc. The accounting standards for taxes are different than for US GAAP, which is the accounting standard for businesses.

One area that would make a very significant difference is in depreciation. For tax purposes, you refer to the MACRS schedule for how long to depreciate your assets. For property, I believe it's 27.5 years or 39 years (up to you). Under US GAAP, however, you determine the useful life of the asset based on how long you think it will last. The most common I've seen is 40 years, but if you owned a skyscraper in Manhattan I could understand the justification of something longer, maybe even 100 years. 

The math looks like this:

Assume you purchased a $100,000 property. For taxes, your annual depreciation expense will be ($100,000/27.5) = $3,636.36. For US GAAP, it's ($100,000/40) = $2,500. So for the IRS, you just lost over $1,000 more in the year.

Also, depreciation is a concept; you don't actually pay for depreciation directly. That's why you can have positive cash flow and still sustain book losses.

Other similar concepts that reduce profits without impacting cash flow are accruals for maintenance and repair, capex accruals, vacancy accruals, etc.

What is the rationale for your 4% annual appreciation in property value? All I've ever heard about Cleveland is that property values are flat. You might be painting a prettier picture over time than is realistic.

How did you get a mortgage to cover 96.2% of the purchase price?

Rent does not equal cash flow... you're not going to pay off a $60k house that rents for $1,000/mo in 5 years.

Can you have the mold tested to see if it poses a health hazard? If it's not a health risk, it should be easy enough to clean it and seal wherever the water might be coming in from. If it is hazardous, clearing the house might be more involved.

Your annualized income is $1,307.04 ($108.92 * 12). Your cash-on-cash return is calculated as your annualized income divided by the amount of cash you put in. If you want a 10% COC, and your income is $1,307.04, your invested capital should not exceed $13,070.40.

That said, where are you getting your expense amounts from?