Rental Property Tax Advantages
Investment real estate has tremendous tax advantages. Where these advantages show up in your taxes is on Schedule E - Supplemental Income and Loss. Before I continue, we are not accountants so this paper is a generalization of how this works. Please consult a tax professional for how it actually works for your specific situation. Said another way, if you use this example as your guide to completing your taxes, plan on getting to know an IRS auditor very well. Also, the financial people will (factually) tell you that I am over simplifying and they are correct. In order to simplify this paper, I made the following assumptions:
- Each month has 30 days and that there are 360 days per year.
- The property is only used for rental purposes, no personal use.
- Only one rental property, which is a single family home.
- The property was purchased on June 17, 2016.
- The purchase price was $200,000
- Financing was 20% down, 4.5% interest, 30-year fixed.
- You received $1,300/Mo. rent starting July 1st or 6 months.
- The rehab cost was $0.
- Annual taxes are $1,100/Yr. Prorated: $1,100 * 197 / 360 = $602
- Depreciation - Assume 80% of the purchase price is depreciable improvements (building, etc.) over 27.5 years (The actual IRS useful life for a residential property). $200,000, 80% / 27.5 Yrs, 197Days / 360Days/Yr = $3184
- Management fee is 8% of collected rent + 1/2 the first months rent = $1,300/2 + (6 1,300 8%) = $1274
- Landlord insurance is $417/Yr or 197 / 360 * $417 = $228
- Utilities include electricity and water during the 2 week rent up period.
I want to point out that depreciation is not optional. Even if you decided not to take advantage of depreciation, when you sell, you will still pay any applicable depreciation recapture. The IRS calculates the amount of depreciation recapture you owe based on "allowed or allowable". So even if you choose not to include depreciation in your tax filings, when you sold the property the depreciation recapture form calculates how much you owe. It does not consider whether you deducted depreciation or not. Depreciation is not optional!
Investment real estate has tremendous tax advantages. In this article I showed the IRS form for investment real estate and paid special attention to depreciation. Hope this helps.