All Forum Posts by: Natalie Kolodij

Many rentals have losses on paper due to depreciation. 

The building value of the rental is written off across 27.5 years. So for example; if you pay $500k for a rental and $400k is building value. 

You likely only made a down payment of 3-20% ....but you still get to write it off on the full value across 27.5 years.

So 400k/27.5 = 14,000 ish a year of a write off where during the year you didn't need to incur an actual expense, no cash outflow. 

So your super basic P&L may look like: 

$30,000 Rents
-$3,000 insurance expense 
-$9,000 interest

-$3,000 taxes

-$8,000 operating expenses

-$14,000 depreciation 

---------------

-$7,000 loss on paper for the year  so negative taxable income 

But remember- $14k of that (depreciation) was something we didn't actually spend money on- so cash in bank at year end would be $7,000. 

So often rentals don't have taxable income; and once they do it's still not subject to the payroll taxes paid by W2 wages or on self employed income. 


But yes; if a rental generates net income after all expenses that is still taxable. 

What the concept you mentioned is talking about is leveraging equity to gain cash vs. selling essentially. 

It's not necessarily saying all of your income from rentals ever will be tax-free (though it could be). 

But if you have 10 rentals. And each go up in value annually. 

And after several years you start doing cash out refinances.....If you can refinance one property every 1-2 years and withdraw $200k of equity....that's not taxable. 

You can now live on that $200k if you want. 

If you wanted to earn $200k to live on at a W2 job....you'd need to earn significantly more because you'd have to pay income taxes, and payroll taxes on the income; where as taking on debt isn't taxable at all. 

Or if you wanted to sell a rental to make the $200k from selling- you'd have to pay capital gains, and unrecaptured depreciation tax and potentially depreciation recapture. 

Your starting depreciable basis should have been the LOWER of what you paid or the FMV in 2010 when you converted it to a condo.

If you had also spend money on renovations and improvements while occupying those should have gone into service then as well. 

For a condo you can/should check the county assessor for land value (you would apply the same allocation %, don't use their actual number listed) Also check your HOA documents. Many counties don't have land for condos- but some HOA's technically allocate you some value.

Did you write off those special assessments in 2010 and 2012?  Assessments are dependent on what they were for. If that $10k assessment paid for a roof you'd capitalize it like a roof. (example)

A 3115 will be required to claimed the missed depreciation. I wouldn't tackle it yourself, The IRS instructions for it estimate 22 hours to learn and complete the form. 

At this point since it's after the fact while not totally correct; you may explore adding the missed asset/basis amount as a selling cost to just reduce your gain. 

 Hey Jason, 

As myself and other tax professionals have mentioned it's considered "in service" once ready and available for rent-and at that point is when you can start reporting it, you can begin depreciating it etc. 

What guidance / cite do you have for only deducting some expenses until it's actively rented?

It is first reported based on when it's in service. 

This is when it's ready and available for rent. If the rental lease started 1/1/2025 it's likely it was technically in service in 2024. 

If your brother is looking to invest in real estate largely from a tax reduction standpoint they should pay a qualified real estate tax strategist to review their specific situation and what may or may not work for them. 

As a starting point: 

-If they work full time and make $700k a year 
-Don't want to or can't spend time self managing a short-term rental 
-Don't have a spouse who wants to take the lead on managing the rentals 

They are likely not going to directly reduce their taxable income with real estate year-to-year. 

There are outlier circumstances and big-picture strategies that could potentially apply; but that's why they need to talk to someone about their specific situation. 

Hi Mia, 

Great suggestions for questions to ask a potential tax professional!

I'm curious about number 4-could you expand on the idea there?

Thanks!

 The standard rule is $250k per person who legally owns/occupies for the 2/5 year requirement. So if 3 siblings all buy a house together and all live in it when they sell up to $750k can be excluded.

If married only one person needs to meet the ownership requirement-but both must meet the use requirement. 

 Hey there, 

Tax pro here. An LLC changes nothing for tax wise and you can write off the same valid expenses with or without an LLC. Whether or not you can deduct losses created by rentals against your personal income depends on your overall income level, the type of rental, if you're a real estate professional, etc. An LLC doesn't impact that.

A lot of people think of real estate this way. 

That they need someone to help them "make it a business" and want an entity to "operate a business". The truth is you either are or aren't a business either way. 

A business for tax intentions is defined in code section 162-and is basically the continuous and ongoing involvement for profit. 

Almost all rentals are technically a business, and your rentals are allowed to deduct the same qualifying business expenses with or without an LLC or an entity.

That being said I do understand what you're saying which is that you're looking for someone to help you treat this like a business-get all your ducks in a row, grow it, etc. 

The license IMO isn't the biggest factor at all. I have clients who are CPAs and pay me to do their taxes. 

The most important factors: 

-They are real estate specialized 
-They have an actual history/ foundation in tax. Looked into someone's history/look on linked in. Many people just "start doing tax" or buy a tax firm and then copy+repeat the same information they hear actual experts talk about without actually knowing any of it themselves. Social media has unfortunately made it way too easy to present as an expert even when someone isn't. 
-They focus on tax planning/strategy and not just tax filing.