Tax calculation with Rental and W2 income over 150k

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sunny_socal
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Tax calculation with Rental and W2 income over 150k

Post by sunny_socal » Tue May 15, 2018 8:33 am

I'm starting a new job and will keep my old house as a rental. I'm terribly confused on how my tax situation will look! :shock:

- $187k W2 annual pre-tax income
- $400k value of property (ie. just the structure, I'll use this as my basis for depreciation over 27.5 years)
- $3k/month rental income
- $3k/month rental expenses (mortgage, insurance, taxes, rental manager fee)

What's an easy way to estimate the impact on my taxes? I've been reading that 'passive' rental expenses are not deductible if your income is over 150k.

Thanks

pshonore
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Re: Tax calculation with Rental and W2 income over 150k

Post by pshonore » Tue May 15, 2018 8:38 am

sunny_socal wrote:
Tue May 15, 2018 8:33 am
I'm starting a new job and will keep my old house as a rental. I'm terribly confused on how my tax situation will look! :shock:

- $187k W2 annual pre-tax income
- $400k value of property (ie. just the structure, I'll use this as my basis for depreciation over 27.5 years)
- $3k/month rental income
- $3k/month rental expenses (mortgage, insurance, taxes, rental manager fee)

What's an easy way to estimate the impact on my taxes? I've been reading that 'passive' rental expenses are not deductible if your income is over 150k.

Thanks
You're correct about passive losses but they do carryover and get used in the following years or at time of sale.

Nate79
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Re: Tax calculation with Rental and W2 income over 150k

Post by Nate79 » Tue May 15, 2018 10:23 am

Why are you keeping the rental?

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sunny_socal
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Re: Tax calculation with Rental and W2 income over 150k

Post by sunny_socal » Tue May 15, 2018 12:35 pm

Nate79 wrote:
Tue May 15, 2018 10:23 am
Why are you keeping the rental?
Because we like the house and we may move back...

This is our first time and being landlords. What is considered a loss?
- Is it the difference between our income and expense?
- Or is it just any expense?

If it's the latter, renting out a home doesn't seem all that attractive

Millennial
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Re: Tax calculation with Rental and W2 income over 150k

Post by Millennial » Tue May 15, 2018 12:42 pm

A passive loss is saying you lost money on your rental. For example, let's say year 1 looks like this:

Rent collected: $10k
Rental expenses (mortgage interest, depreciation, maintenance, utilities): $15k
Paper loss: $5k

You could not use this paper loss to reduce your taxable income from $187 to $182k. However, you can carry it forward so that in a later year, if you do show a profit on the rental, you can use it to reduce that profit. For instance, if this is year 2:

Rent collected: $15k
Rental expenses: $8k
Profit: $7k
Year 1 passive loss carried forward: $5k
Year 2 profit that gets entered on your 1040: $2k

So in that case, (assuming your W2 income stays the same) your 1040 income would only go from $187k to $189k on paper, even though it was really $194k that year.

Also a note about what you called "expenses" above - your MORTGAGE is not deductible against rental income. Some parts of your PITI (insurance, tax and interest) are but NOT principal.

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sunny_socal
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Re: Tax calculation with Rental and W2 income over 150k

Post by sunny_socal » Tue May 15, 2018 12:48 pm

I see, thanks Millenial! I thought it might end up being a terrible deal for us, but this doesn't sound that bad.

niceguy7376
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Re: Tax calculation with Rental and W2 income over 150k

Post by niceguy7376 » Tue May 15, 2018 12:51 pm

sunny_socal wrote:
Tue May 15, 2018 8:33 am
- $3k/month rental income
- $3k/month rental expenses (mortgage, insurance, taxes, rental manager fee)
Income on this rental property is the rent that you receive
Expense - only the interest part of the mortgage loan, property depreciation amount for that year, insurance, property taxes, any HOA fees, rental manager fee, some expenses that you can deduct immediately.

Based on your numbers, how much of your monthly mortgage is interest?
Also, the depreciation amount would be nearlu close to (value of the house when it started renting/ 27.5 years).
So you can now run the numbers and see how it will turn ount.

If you are then getting a net profit, then that gets carried over to your 1040 and you pay the highest tax bracket level on that income

ralph124cf
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Re: Tax calculation with Rental and W2 income over 150k

Post by ralph124cf » Tue May 15, 2018 1:23 pm

Comments on depreciation:

You can only depreciate your basis in the building, not the land under the building.

Your basis in the building is the lower of cost or current market when you start renting out the property.

If you are in a low cost of living area, the building is probably worth 5-10 times the land cost. If you are in the SF Bay area, those proportions could well be reversed.

Ralph

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sunny_socal
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Re: Tax calculation with Rental and W2 income over 150k

Post by sunny_socal » Tue May 15, 2018 1:28 pm

niceguy7376 wrote:
Tue May 15, 2018 12:51 pm
sunny_socal wrote:
Tue May 15, 2018 8:33 am
- $3k/month rental income
- $3k/month rental expenses (mortgage, insurance, taxes, rental manager fee)
Income on this rental property is the rent that you receive
Expense - only the interest part of the mortgage loan, property depreciation amount for that year, insurance, property taxes, any HOA fees, rental manager fee, some expenses that you can deduct immediately.

Based on your numbers, how much of your monthly mortgage is interest?
Also, the depreciation amount would be nearlu close to (value of the house when it started renting/ 27.5 years).
So you can now run the numbers and see how it will turn ount.

If you are then getting a net profit, then that gets carried over to your 1040 and you pay the highest tax bracket level on that income
Expenses:
- Depreciation = 14545/yr
- Interest = 8000/yr (this will decline significantly since we only have ~10 years left on the loan)
- Taxes = 7000/yr
- Insurance = 1000/yr
- Rental Mgr = 3600/yr
TOTAL: 34145

If income = 36k/yr, I guess we're only "losing" a couple thousand.

I'll also have a HELOC against the house, are there any circumstances where I could deduct that interest as well?

Nate79
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Re: Tax calculation with Rental and W2 income over 150k

Post by Nate79 » Tue May 15, 2018 1:54 pm

sunny_socal wrote:
Tue May 15, 2018 12:35 pm
Nate79 wrote:
Tue May 15, 2018 10:23 am
Why are you keeping the rental?
Because we like the house and we may move back...

This is our first time and being landlords. What is considered a loss?
- Is it the difference between our income and expense?
- Or is it just any expense?

If it's the latter, renting out a home doesn't seem all that attractive
You may move back to that specific house or the area? "May" is a pretty loose word to keep a rental that doesn't look too attractive. On the face of it your rent is low using the 1% rule and you are significantly underestimating your operating costs including upkeep and vacancy. You are going to be cash flow negative.

You should also consider the tax ramifications to move back to this house which will affect the financial evaluation of whether you should keep the house or not.

What are your cash reserves in case of vacancy and repairs?
Is the insurance rate you quote for a rental property or your existing insurance rate?
How much equity do you have in the house, how much has it grown in value since you purchased and if you sold do you qualify for tax free on the growth?

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sunny_socal
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Re: Tax calculation with Rental and W2 income over 150k

Post by sunny_socal » Tue May 15, 2018 3:07 pm

Nate79 wrote:
Tue May 15, 2018 1:54 pm
sunny_socal wrote:
Tue May 15, 2018 12:35 pm
Nate79 wrote:
Tue May 15, 2018 10:23 am
Why are you keeping the rental?
Because we like the house and we may move back...

This is our first time and being landlords. What is considered a loss?
- Is it the difference between our income and expense?
- Or is it just any expense?

If it's the latter, renting out a home doesn't seem all that attractive
You may move back to that specific house or the area? "May" is a pretty loose word to keep a rental that doesn't look too attractive. On the face of it your rent is low using the 1% rule and you are significantly underestimating your operating costs including upkeep and vacancy. You are going to be cash flow negative.

You should also consider the tax ramifications to move back to this house which will affect the financial evaluation of whether you should keep the house or not.

What are your cash reserves in case of vacancy and repairs?
Is the insurance rate you quote for a rental property or your existing insurance rate?
How much equity do you have in the house, how much has it grown in value since you purchased and if you sold do you qualify for tax free on the growth?
- House worth 750k, we have 450k in equity
- We've lived in the house for 5 years, I suppose we'd get the growth tax free if we sell it in the next few years
- Cash flow: rental manager is estimating between 3000-3500/month (haven't signed a contract yet with him)
- Cash reserves 24k if things really hit the fan. But house is in southern california, rental market looks good for us right now
- Will likely be worth $1M after 5 years if growth continues as before
- Don't have a quote on the 'new' insurance yet (for the rental scenario)

We could very well move back into this house. It's a single story building, has a big driveway and plenty of space. Perfect for old people! :happy

riverguy
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Re: Tax calculation with Rental and W2 income over 150k

Post by riverguy » Wed May 16, 2018 4:28 am

sunny_socal wrote:
Tue May 15, 2018 1:28 pm
niceguy7376 wrote:
Tue May 15, 2018 12:51 pm
sunny_socal wrote:
Tue May 15, 2018 8:33 am
- $3k/month rental income
- $3k/month rental expenses (mortgage, insurance, taxes, rental manager fee)
Income on this rental property is the rent that you receive
Expense - only the interest part of the mortgage loan, property depreciation amount for that year, insurance, property taxes, any HOA fees, rental manager fee, some expenses that you can deduct immediately.

Based on your numbers, how much of your monthly mortgage is interest?
Also, the depreciation amount would be nearlu close to (value of the house when it started renting/ 27.5 years).
So you can now run the numbers and see how it will turn ount.

If you are then getting a net profit, then that gets carried over to your 1040 and you pay the highest tax bracket level on that income
Expenses:
- Depreciation = 14545/yr
- Interest = 8000/yr (this will decline significantly since we only have ~10 years left on the loan)
- Taxes = 7000/yr
- Insurance = 1000/yr
- Rental Mgr = 3600/yr
TOTAL: 34145

If income = 36k/yr, I guess we're only "losing" a couple thousand.

I'll also have a HELOC against the house, are there any circumstances where I could deduct that interest as well?
How is income of 36k a yr with expenses of 34k a yr, including accounting charges, “losing” money?

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sunny_socal
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Re: Tax calculation with Rental and W2 income over 150k

Post by sunny_socal » Wed May 16, 2018 1:30 pm

riverguy wrote:
Wed May 16, 2018 4:28 am
sunny_socal wrote:
Tue May 15, 2018 1:28 pm
niceguy7376 wrote:
Tue May 15, 2018 12:51 pm
sunny_socal wrote:
Tue May 15, 2018 8:33 am
- $3k/month rental income
- $3k/month rental expenses (mortgage, insurance, taxes, rental manager fee)
Income on this rental property is the rent that you receive
Expense - only the interest part of the mortgage loan, property depreciation amount for that year, insurance, property taxes, any HOA fees, rental manager fee, some expenses that you can deduct immediately.

Based on your numbers, how much of your monthly mortgage is interest?
Also, the depreciation amount would be nearlu close to (value of the house when it started renting/ 27.5 years).
So you can now run the numbers and see how it will turn ount.

If you are then getting a net profit, then that gets carried over to your 1040 and you pay the highest tax bracket level on that income
Expenses:
- Depreciation = 14545/yr
- Interest = 8000/yr (this will decline significantly since we only have ~10 years left on the loan)
- Taxes = 7000/yr
- Insurance = 1000/yr
- Rental Mgr = 3600/yr
TOTAL: 34145

If income = 36k/yr, I guess we're only "losing" a couple thousand.

I'll also have a HELOC against the house, are there any circumstances where I could deduct that interest as well?
How is income of 36k a yr with expenses of 34k a yr, including accounting charges, “losing” money?
I was wrong on that particular calculation, I was confused between what gets reported to the IRS and our *real* expenses. (in my mind 'depreciation' is an artificial construct.)

If I use the _real_ numbers the situation is worse (ie. if include principal in the mortgage payment, not just interest)
Then our expenses are:
- Principal & interest: 28200
- Insurance: 1000
- Fees: 3600
- Tax: 7000
- TOTAL: 39800

Loss = about 4000

If we are able to get a bit more rent (eg 3500/month), then we'd be ahead by 2000/year.

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sunny_socal
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Re: Tax calculation with Rental and W2 income over 150k

Post by sunny_socal » Sun May 20, 2018 7:47 am

No one was able to help me out with my original question, but I eventually found this calculator:
https://www.allpropertymanagement.com/r ... -sell.html

One must select 'advanced options' in order to properly enter the current mortgage parameters.

BH Landlords: please try it out and let me know if it's accurate. Thanks! :beer


EDIT: Here's another one, but it's an example of a tax sheet rather than a calculator
https://www.wikihow.com/Calculate-Taxab ... Properties

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