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.