Is Rental Income Taxed By The IRS The Same As Regular Income?
I am a new landlord renting out my first rental property. Does the IRS consider rental income as regular income and tax accordingly (30%)? Are there any special tax breaks or deductions?
With residential invetment properties the income is almost completely offset by expenses. The reason for this is because residential properties are depreciated over 27 1/2 years. So if the improvments have a value of $200,000 then each year they can have a depreciation expense of $7220.22.
At the time of sale the depreciation is recaptured at a rate of 25% for federal, however, this can be further deferred using a 1031 tax deferred exchange.
fh4rent,
Ask your CPA if you can file Form 3115 and take a one time charge for :"catch up" depreciation to put you on the correct place in the straight line depreciation schedule.
NewKid, I have since sold that property and did a 1031 to 3 new ones, is the 3115 still an option?
Thanx, Don
I believe that window has closed.
are you able to deduct the full cost of the mortgage?
Here is my situation, renting house out for $2395 a month.
* property management company takes $191/month
* repair fee ranges each month
* mortgage, insurance, property tax payment $2300 /month
Will I be taxed the full $2395/month or can I deduct all three things I listed below.
. [ Edited by molarband on Date 07/19/2005 ]
Quote:
On 2005-07-19 11:04, molarband wrote:
are you able to deduct the full cost of the mortgage?
Mortgage interest is generally deductible.
Quote:
Here is my situation, renting house out for $2395 a month.
* property management company takes $191/month
* repair fee ranges each month
* mortgage, insurance, property tax payment $2300 /month
Will I be taxed the full $2395/month or can I deduct all three things I listed below.
All the expenses you listed above are generally deductible:
Mangement fees
Taxes
Mortgage interest
Insurance
Repairs
But note that only the interest portion of your mortgage payment is deductible, not any principal payments.
Again the rules for taxing real estate income are complicated. Rules limiting passive losses for example. Rules for people who are in the business of renting real estate may have to use shcedule c instead of e for example...you may put your properties in entities to reduce you liability and taxes that complicate your tax situation.
A competent tax professional is a real estate investors best friend!
For your rental property activity, the typical monthly mortgage payment consists of Principal, Interest, Taxes, and Insurance (PITI).
The Principal component of your mortgage payment is the repayment of a loan and is not a deductible expense.
The Interest component of your mortgage payment is an allowed expense (mortgage interest) on your Schedule E.
The Taxes and Insurance components are payments to an escrow account and are NOT deductions. However, the actual amounts withdrawn from your escrow account and paid for property taxes and your hazard insurance premium are expensed against your rental income on Schedule E.
There are other allowed expenses, including depreciation, found in IRS Publication 523.
Rental property operation is generally a passive income activity reported on Schedule E.