Tax Advantages Of Real Estate (rentals)
I am close to buying an eight unit apartment that is close to break even on the rental income versus expenses. Actually, it is about $250 positive monthly after PITI etc...
The purcahse price is $500K. Considering depretiation and upkeep it will be negative on paper. Will that loss extend to tax savings on my "regular" full time job income or does it stop when I deplete the $250 per month income from the property? Thanks in advance. Cataman
Well depreciation would be the value of the building over 27.5 yrs. Thats the amount you can write off. But my question is, why are you buying an 8 unit apt that is only barely break even on cash flow? Are you including maintenence and everything in this equation? I'm buying a 4-plex for $120k that is going to cash flow $1000 month fully rented(before maintenence).
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On 2004-12-01 14:07, cataman wrote:
I am close to buying an eight unit apartment that is close to break even on the rental income versus expenses. Actually, it is about $250 positive monthly after PITI etc...
The purcahse price is $500K. Considering depretiation and upkeep it will be negative on paper. Will that loss extend to tax savings on my "regular" full time job income or does it stop when I deplete the $250 per month income from the property? Thanks in advance. Cataman
Zero down is driving the cost up. Some badly needed increases in rents will help increase the cash flow. I want to do it slowly though so that I don't end up with 8 vacant units.
Cataman: Yes, you will be able to offset some of your W2 income from a paper loss on the property. There are income limits and you must activly participate in the management of the building, though. You should go to the IRS web site and read about it under losses from rental property.
If your gross income is under $100k, rental losses are deductible up to $25k. As your gross income approaches $150k the $25k deduction phases out and your losses are postponed.
Financing terms for 8 units and 4 units are completely different. I'm guessing most 4-plexes would not have positive cash flow if they had the same financing as 8 unit properties. Also, there are some areas where cost to rent ratio doesn't give a positive cash flow. Only option there is to know the seller and get it below market.
True, financing is different, but the difference between a few percentage points shouldn't make or break a deal. But if the 8 unit loan is a shorter term, then you can take into the added account of principal payoff as it will be much greater than a typical 30yr fixed.
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On 2004-12-01 16:05, blueford wrote:
If your gross income is under $100k, rental losses are deductible up to $25k. As your gross income approaches $150k the $25k deduction phases out and your losses are postponed.
Financing terms for 8 units and 4 units are completely different. I'm guessing most 4-plexes would not have positive cash flow if they had the same financing as 8 unit properties. Also, there are some areas where cost to rent ratio doesn't give a positive cash flow. Only option there is to know the seller and get it below market.
Me again. If I close on this property in December, 2004, can I depreciate the property for the entire Calendar Year 2004? Would it be best to try to close in December or wait until the new year?
I beleive depreciation is prorated for the year put in service.
Real property uses the mid-month convention for tax depreciation. Thus, first year depreciation for real property placed in service in December would be .5/12th a whole year's depreciation.
When does a multi-unit apartment building become a commercial building and therefore takes on a 39 or 40 year depreciation schedule?
Does it ever -- even if the property has 100 units? Or is residential rental property always residential rental property regardless of the number of units?
Residential in this case means human occupancy; as in, people live there. It does not matter how many units are in the complex.
I agree with jspaeth. I think a lot of people get confused because for financing, anything above 4 units in considered "commercial" financing, but for taxes "commercial" is just non-residential.