So, next year, I may keep this house I am in now, rent it out, and then move into a nicer, larger house with my fiancee. My question is in regards to the income taxes. Currently, I am able to write off the tax, insurance, and interest on the home. When I use it for a rental property, can I still write off those three things?
Second, how does it work with claiming the money I get form the tenants. If I charge $1,000 a month rent, will that be an extra $12,000 that I claim as income for that year on my taxes, or would it be $1,000 per month less what I pay on the house, times 12 that I would claim?
Basically trying to find out if there are any tax benefits for renting, or if the only benefit is that I would have someone else be helping to pay down my mortgage.
Yes you can take all those expenses plus more (including depreciation). I would just look at a Schedule E form. That will give you a pretty good idea for all the expenses. Rental expenses are an above the line deduction (meaning you don’t have to itemize to take them basically).
The rental income received will be offset by all of those expenses.
PS. I assume by insurance you mean PMI (not homeowners insurance is not an itemized deduction- it can be confusing how it’s portrayed in TurboTax type programs). Homeowners is a valid expense for a rental property though.
Basically, at the end of the day, if I am currently getting say, $3,500 back from taxes, I would like to continue to get $3,500 back from taxes, even if I am making an extra $12,000 from the rental income. So, if the write-offs that would come from it like you mentioned, PMI, interest, taxes, and then depreciation, etc… equal out the taxes paid from the income, I’d be one happy camper!
Another big question I have is related to the actual lease agreement. I should definitely meet with a lawyer to come up with the details, to protect my ass from bad tenants, right?
Meeting with lawyer to get a good lease together isn’t necessary really. Check out biggerpockets.com or I can send you my lease.
Your logic about the $3500 refund is way off base. You would be taking in an additional $12000!!! in rental income haha. I think that sounds like a nice offset.
Well, not really! If I take in 12,000, 10,000 of that will go to pay the mortgage and taxes, and then the remaining 2,000 will go into my pocket. But, of that 12,000, I’ll have to pay income taxes on it, which will probably be greater than 2,000! That is where I am hoping that the deductions offset it.
Save every Home Depot and Lowes reciept all year…anything you buy house-related you can say is for the rental property and it comes off the total. Not to mention advertising expenses, cleaning expenses, insurance, taxes, interest on the mortgage, etc. once it becomes a rental. Plus you can depreciate the price you paid for the house over a number of years to offset the income. You can even exceed the amount you bring in and claim a loss of up to $25k if you do major capital upgrades.
Here is how it works. Income - expenses and depreciation = taxes owed on any net gain. So in your example, $12,000-10,000=$2000 of which you’ll owe taxes on. Which would probably be around $500 for most people. If you spend more in expenses than you take in, your loss brings down your adjusted gross income.
Like Joe said, keep every receipt that looks like it could go toward the rental and claim it as an expense. And yes you can write off mortgage interest, taxes, homeowners insurance, utilities (if you pay any) against your rental income. Don’t forget, you’ll also get to write off your mortgage interest and taxes on the new house also.
You can get a lease agreement off line for $10, it’s definitely not worth going to a lawyer for. Just screen your tenants well and credit check them if you aren’t sure.
I don’t think that regular mortgage payments are considered expenses, are they? I believe you can deduct mortgage interest as expenses though, which tends to be a good majority of the total cost!
So that Schedule E form makes pretty good sense, say I take in $12,000, I write off $6,000 in interest, $3,000 in taxes, etc… So then I claim taxes on the $3,000 left over, which on average is ~ 30% or so, so it would be like $1,000 in taxes. That’s easy. I am over-simplifying, but yeah.
So then, when it comes time to your deductions on the rest of your tax paperwork, you can’t claim the interest and taxes from this property again, right? I assume no, since you are already claiming them for the above paperwork. Probably a super basic question, but I want to make sure I understand it all fully. But on my main house, I can continue to claim the interest and tax, just like I normally would.
The schedule E is part of your taxes. So no you can’t deduct again. There really isn’t any difference than what you do now. You’re basically just trying to get the rent you collect down to zero so you don’t have to pay taxes on any income.
And yes you can deduct the interest and taxes on your primary residence just like you did on the rental property when you lived there.
1 - You can write off both direct and indirect expenses relating to operating a business. How aggressive you can get depends on your accountant. Word of caution, do not rent unless the property is owned in an LLC - tenants are notoriously litigious and will find ways to sue you, plus there’s always the good old slip + fall and lead paint issues (house built before 1976?). It’s just smart to protect your personal assets. Typically, you can write off mortgage interest as a cost of doing business. If you pay utilities, you can write those off as well. You can also claim deductions for improvements, maintenance, insurance, etc . . . if you need a CPA who will get it done for you, get in touch with me (you have my cell phone). My CPA cost me $500 for my return last year and saved me $7,000 on my taxes.
ALSO - the biggest #1 benefit to owning rental property - depreciation. You need this calculation to be actuarially sound, but it will give huge huge benefits to your deductions. Total worth hiring a CPA to do this.
2 - Income that is received is income that you claim and pay tax on. A good rental property will wash out (deductions equal income), so at the end of the day you’re gaining equity for free, with other people’s money. If your tenant pays you in cash, well, they never really paid you, did they?
I own 6 rental units - it’s extra work, but worth it in the end for the aforementioned benefits.
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It’s worth paying a lawyer $200 to draw up a specific lease - I always run into leases drafted by non-lawyers that are full of holes, and wind up causing massive problems down the line (which require hiring lawyers to fix, for thousands, instead of hundreds, of dollars).
You’re probably right. I’m a CPA and my girlfriend is a lawyer so it’s cheating for me haha. Once a good accountant explains the Schedule E to you in person Mark, you’ll understand a lot better I think and then the accountant can prepare you to keep better records for future years.
LLC’s do absolutely nothing if you are still doing the management and any of the maintenance of the property. having individual ones for each property may protect the other properties from getting tied up in a dispute but they won’t stop you personally from getting tied up in a dispute. if you replace a lightbulb and the next day the house burns down from an electrical fire from your lightbulb replacement you are most certainly personally liable for that…no LLC is going to protect you in such matters.
people who are truly concerned with litigation don’t manage or maintain their properties personally. when something bad happens you want to be able to sue someone too.
