Author Topic: reducing my income tax with mortgage interest from a rental property.  (Read 3242 times)

MidwestMustache

  • 5 O'Clock Shadow
  • *
  • Posts: 5

So I have a tax question, and have no idea where to get an answer.
Who would I contact?  Could I go to H&R Block to get these answers, or do they only do taxes?
If anyone can either answer it or point me in the right direction, Id greatly appreciate it. Thanks.

Would buying a rental property now/before the end of the year reduce my taxes?
I know I wouldnt have much mortgage interest(it being october), but could I pay points? or ??
(Or how beneficial would it be for this tax year to own a rental unit?)
Could I arrange with lender to pay a years worth of interest upfront? or one big balloon payment the first month?
would that interest even matter? or how much mortgage interest from a rental unit would it take to reduce my taxes?
Other than an IRA contribution, Im seeking any ideas to reduce my taxes.

Please dont stray off-topic or comment about how difficult it is to get financing, how difficult it is to be a landlord, etc.
Everything else is secondary and Im the type of person who can find a way if there is a way ( or I'll make a way).  = )
My total wages/earnings this year will be approx. 41,800, and by the end of the year 9,500 will have been withheld for taxes.
Im filing as single, living with someone so dont have a personal mortgage. no other deductions (yet).

Any thoughts or ideas greatly appreciated. Thanks.

jda1984

  • Stubble
  • **
  • Posts: 179
Re: reducing my income tax with mortgage interest from a rental property.
« Reply #1 on: October 07, 2014, 12:35:12 PM »
Midwest,

There are expenses you could deduct for a rental property (interest and insurance being the first two that come to mind).  Other expenses include repairs and upgrades (though some upgrades may trigger the need to capitalize the expense).  Generally speaking, if you are only looking for deductions/reducing tax burden and don't necessarily want rental property/landlord responsibilities, maxing out your 401k and any IRAs you have (and HSA if you qualify with a HDHP) is a better bet.

Aphalite

  • Bristles
  • ***
  • Posts: 425
Re: reducing my income tax with mortgage interest from a rental property.
« Reply #2 on: October 07, 2014, 12:43:38 PM »
If you are only making 42k - contributing max to 401k (17.5k), HSA (3.3k), and IRA (5.5k) would lower your taxable income to 16k, after personal standard deductions you'd be at 6k for a 10% tax rate - which means it'd probably even make more sense to eat the 15% tax on your IRA and make it a Roth instead (if you can live on under 16k)

tracylayton

  • Guest
Re: reducing my income tax with mortgage interest from a rental property.
« Reply #3 on: October 07, 2014, 01:32:03 PM »
I bought a rental property and closed 4th Qtr one year. It needed new appliances (missing) and new carpet (also missing). I only had it rented out for the last 2 months of that year, but was able to write off loan origination fee, any points paid, mortgage interest, taxes and all of the repairs. I would check with a CPA, but that's what mine did.

Terrestrial

  • Bristles
  • ***
  • Posts: 294
Re: reducing my income tax with mortgage interest from a rental property.
« Reply #4 on: October 07, 2014, 01:52:19 PM »

Would buying a rental property now/before the end of the year reduce my taxes?
I know I wouldnt have much mortgage interest(it being october), but could I pay points? or ??
(Or how beneficial would it be for this tax year to own a rental unit?)
Could I arrange with lender to pay a years worth of interest upfront? or one big balloon payment the first month?
would that interest even matter? or how much mortgage interest from a rental unit would it take to reduce my taxes?
Other than an IRA contribution, Im seeking any ideas to reduce my taxes.



I own a rental and do the taxes/accounting for it myself.

A rental property in and of itself wont reduce your taxes, you can't take the mortgage interest and itemize it like you would for a primary residence which is what I think your post is implying.  It may result in you paying more in taxes (a 'good' problem as it would indicate you made money).  The rental has it's own separate 'ledger' and at the end if you have a net gain you will pay taxes on the income.  If you have a net loss you MAY be able to write if off and that would reduce your taxes.  Expenses from rentals like mortgage interest cannot carry over directly to your personal itemized deductions.

You take whatever rent/income you earn from the rental and subtract:
Mortgage Interest
Prop Taxes (when paid...if they are not due before the end of the year you can't deduct them for this year)
HOA fees
Insurance
Depreciation expense
Repairs/maintenance/cost to get rental ready and find tenants
Some buying expenses

This is reported on Schedule E.  If the result is a negative then you MAY be able to write off the loss against your income and thus reduce your taxes.  Read the IRS publication on passive loss rules to see if you qualify for your situation.

If you are looking at this strictly as a way to lower taxes then you will likely be better off maxing a 401k or if you haven't already for the year, putting 5500 into a traditional deductible IRA, to get your taxable income down as low as possible.

MidwestMustache

  • 5 O'Clock Shadow
  • *
  • Posts: 5
Re: reducing my income tax with mortgage interest from a rental property.
« Reply #5 on: October 07, 2014, 02:03:37 PM »
If you are only making 42k - contributing max to 401k (17.5k), HSA (3.3k), and IRA (5.5k) would lower your taxable income to 16k, after personal standard deductions you'd be at 6k for a 10% tax rate - which means it'd probably even make more sense to eat the 15% tax on your IRA and make it a Roth instead (if you can live on under 16k)

Thanks for your reply! I understand exactly what you said, however, even though I have a frugal/conservative budget, I cant live on 16k/year right now. (I doubt most could).  I need to diversify in to real estate, and I'd really like to employ some conservative leverage in my greater investment plan. (Im probably making the 5.5k contribution into my IRA, but my original questions still stand.)

Let me try to give you an example with abstract numbers Im pulling out of thin air.
I could be considering a $100K rental with a 10 year mortgage, or a $250k rental with a 30 mortgage.
Id like to be able to figure out how each choice/option would affecet my taxes before I decide how much to spend.
This post has nothing to do with what I can afford. I know what I can conservatively afford/sleep with at night.
Im just wondering how to find out how the numbers on any rental unit will affect my taxes.


Terrestrial

  • Bristles
  • ***
  • Posts: 294
Re: reducing my income tax with mortgage interest from a rental property.
« Reply #6 on: October 07, 2014, 02:09:33 PM »

My total wages/earnings this year will be approx. 41,800, and by the end of the year 9,500 will have been withheld for taxes.
Im filing as single, living with someone so dont have a personal mortgage. no other deductions (yet).


Also note that while not technically 'reducing' your taxes (what's owed is owed)...you may want to consider adjusting your W-4, it seems horribly out of whack and would result in an immediate monthly cash flow benefit.  For your situation:

41800
- 6200 (std deduction)
- 3950 (personal exemption)
=31650 taxable income

This puts you in the 15% marginal bracket for a single person and you should only owe ~4300 (that's even assuming no 401k/IRA contribution which would reduce it further).


johnhenry

  • Bristles
  • ***
  • Posts: 304
  • Age: 38
  • Location: Midwest
Re: reducing my income tax with mortgage interest from a rental property.
« Reply #7 on: October 07, 2014, 02:28:52 PM »
If you are only making 42k - contributing max to 401k (17.5k), HSA (3.3k), and IRA (5.5k) would lower your taxable income to 16k, after personal standard deductions you'd be at 6k for a 10% tax rate - which means it'd probably even make more sense to eat the 15% tax on your IRA and make it a Roth instead (if you can live on under 16k)

Thanks for your reply! I understand exactly what you said, however, even though I have a frugal/conservative budget, I cant live on 16k/year right now. (I doubt most could).  I need to diversify in to real estate, and I'd really like to employ some conservative leverage in my greater investment plan. (Im probably making the 5.5k contribution into my IRA, but my original questions still stand.)

Let me try to give you an example with abstract numbers Im pulling out of thin air.
I could be considering a $100K rental with a 10 year mortgage, or a $250k rental with a 30 mortgage.
Id like to be able to figure out how each choice/option would affecet my taxes before I decide how much to spend.
This post has nothing to do with what I can afford. I know what I can conservatively afford/sleep with at night.
Im just wondering how to find out how the numbers on any rental unit will affect my taxes.

The best way for you to do this is: download the tax forms and start plugging in your estimates for your potential RE investments. Alternatively, if you file online, you can sign in and just run through the different scenarios there.  If you've never done it before, you'll want to concentrate on the Schedule E; that's where all your income and expenses for your RE will be reported, including depreciation.  Keep in mind, depreciation is tax deferment.  You'll get the benefit of claiming it as an expense this year, but you'll pay it back when you sell, unless you arrange additional deferment.... which is possible.

But to address your question directly.  Yes, buying a place late in the year can certainly help you to lower your tax bill for that year (since cash reporting is allowed, as opposed to accrual).  If you buy a place and put it into service for only the last quarter of the year.... you will have income for one quarter of the year.  Likewise, the mortgage interest expense will reflect one quarter of the year.  Same with depreciation.  But you will have the option of paying your insurance up front for a whole year, you'll likely be able to pay the taxes on it for a year.  For your repairs/supplies.... those would need to be purchased after the unit was placed in service, otherwise they'd become part of your cost basis, and not listed as expenses.  If you fill out a mock Schedule E with all estimated expenses/income that will be incurred on or before Dec 31, you'll see what your paper loss will be.  And it will almost certainly be a loss.  Even for a place with high cash flow, it would be hard enough to to clear enough in a couple months to offset a whole year of taxes and insurance.

With all that said, you don't avoid those taxes.  You just incur and report the income next year.  And hopefully you make enough on the place next year to need to pay tax.  Hope that helps.

I also want to point out that I'm not necessarily recommending this investment.  It would be wise to make sure there's a good reason to do this.  As others have pointed out, based on your gross income there are good alternatives to minimizing your tax bill.


MidwestMustache

  • 5 O'Clock Shadow
  • *
  • Posts: 5
Re: reducing my income tax with mortgage interest from a rental property.
« Reply #8 on: October 07, 2014, 02:34:30 PM »
Terrestial : Thank you!!

1. I now know that rental property is its own balance sheet, and rarely if ever carries over to the personal balance sheet.
Now that I know this, I can tinker/estimate/plan/schedule/play with numbers on the schedule E to give me an accurate idea of what it will ultimately turn out to be.
2. I just noticed that the original 9500 figure actually includes all post tax deductions like short term disability insurance, health insurance, and other things, so the actual tax is a bit less.

Cant reply fast enough, heh.
Thanks again.


Cpa Cat

  • Handlebar Stache
  • *****
  • Posts: 1551
Re: reducing my income tax with mortgage interest from a rental property.
« Reply #9 on: October 07, 2014, 03:01:58 PM »

So I have a tax question, and have no idea where to get an answer.
Who would I contact?  Could I go to H&R Block to get these answers, or do they only do taxes?
If anyone can either answer it or point me in the right direction, Id greatly appreciate it. Thanks.

Would buying a rental property now/before the end of the year reduce my taxes?
I know I wouldnt have much mortgage interest(it being october), but could I pay points? or ??
(Or how beneficial would it be for this tax year to own a rental unit?)
Could I arrange with lender to pay a years worth of interest upfront? or one big balloon payment the first month?
would that interest even matter? or how much mortgage interest from a rental unit would it take to reduce my taxes?

The answer to your interest prepayment question is "No." You can't prepay interest to lower your taxes.

Points - could be deductible for your primary residence on an initial mortgage. But for a rental (or refinance), they are amortized over the life of the loan.

You won't get quality tax planning from H&R Block. You will have better luck consulting with a CPA.

MidwestMustache

  • 5 O'Clock Shadow
  • *
  • Posts: 5
Re: reducing my income tax with mortgage interest from a rental property.
« Reply #10 on: October 07, 2014, 03:14:53 PM »
JohnHenry:  Thanks for your comment/help!

I really appreciate your input, and dont believe owning a rental property is simple or easy or effortless.  I think Im aware of the work, effort, risk involve, and even the reality/possibility of the unknown risk involved.  Ive heard crazy stories of headaches, troubles and law suits, but am young and willing to put up with it.  Id also like to diversify a little and have more than just stocks/bonds. I need some conservative leverage, and if I can find a property to hold onto long term, it will all be worth it.
Thanks again.

Terrestrial

  • Bristles
  • ***
  • Posts: 294
Re: reducing my income tax with mortgage interest from a rental property.
« Reply #11 on: October 07, 2014, 04:29:51 PM »
JohnHenry:  Thanks for your comment/help!

I really appreciate your input, and dont believe owning a rental property is simple or easy or effortless.  I think Im aware of the work, effort, risk involve, and even the reality/possibility of the unknown risk involved.  Ive heard crazy stories of headaches, troubles and law suits, but am young and willing to put up with it.  Id also like to diversify a little and have more than just stocks/bonds. I need some conservative leverage, and if I can find a property to hold onto long term, it will all be worth it.
Thanks again.

I think what he was mostly getting at is to make sure the rental is actually a good INVESTMENT on it's own merits...tax effects (especially trying to shield taxes on your salary) should be pretty low if not at the bottom on the list of concerns when considering property investments. 

Make sure that the property will have strong rental demand and strong positive cash flow, and at least in the short term not need any major/costly repairs...tax writeoffs are small recompense for losing money (in your circumstance a tax writeoff is worth only 15 cents back for every dollar lost). 

Good luck!


« Last Edit: October 07, 2014, 04:31:55 PM by Terrestrial »