What Is The Best Way To File Taxes On Rental Property And Income?
Is it best to wait to the end of the year or do it quarterly. I also heard somewhere that if the property is being held for the long haul that profits are considered passive. Does this mean the profit income is not taxed?
Thanks
Quinn
You still file your taxes once a year, but you include a schedule where you list your rental income and expenses.
If you project that you will have a lot of income that is not subject to witholding, then you are required to make a quarterly deposit - but for the first year you are given some slack since they don't fine you as long as you deposited as much as you were required to last year -
Subject is loing and tedious and too much for me to deal wioth here - but it is well documented. If you have your taxes done by someone you might ask them to explain it. Look at last years 1040 package - its all there.
I would suggest a good accountant who is savy with real estate. Many times my depreciation shielded any profit that I had for the year. Therefore, no quarterly projections. If you have a profitable income from real estate - not other income, ie payroll from another job, etc., then you would definetly discuss with your accountant. Only a small part of real estate losses can not be applied to other income. Only real estate income or capital gains. The tax laws seem to change every day. Be wary. Pay for good advice. My advice is from experience. By the way, I always ask an accountant the following questions:
Do you believe in black and white, or do you believe in black, white or grey?
If he believes in black and white, walk, no run. You want someone working for you. If their is a question on an expense being taxable and it is in a grey area, I always took the expense. If audited, I would pay the interest and penalty. You need the accountant to work for you, not the IRS.
Chuck
Hello, Quin
If you are holding property for the long haul and you are reasonably leveraged the depreciation is likely to cover the remainder of your net income on a residential property that has 27.5 depreciation schedule. Using a good tax person is excellent advise. One property I bought in 2002 had a new roof put on and we separated the roof from the rest of the property and depreciated it over 10 years. There is a window from sometime in 2002 to sometime in 2005 (check with tax person) where property with less than 20 years depreciation schedule if placed in service within the window there is a 30% writeoff the first year. My roof qualified!
Bottom line is that you likely will not need to pay estimated taxes, however, you should run this by your tax person.
Another factor on taxes is that real estate losses (after depreciation) which is passive income (loss) can offset earned income up to $25,000 if adjusted gross income is less than $100,000 and linearly goes to zero at $150,000. Excess losses are carried forward to subsequent years.
If you are turning properties you need to be careful about not being declared a dealer where all of your properties including long term holds will be declared as inventory and depreciation will not be allowed.
I hope this is useful for you.
Happy investing,
Ed
Wow, I agree with CaroltheGreat, lot of ground to cover here. One thing I want to point out is how great passive income is. You are still taxed on your passive income, but for federal tax purposes you will only pay income tax. Passive income is not subject to SE tax (social security and medicare), which is 15.3%.