Author Topic: Investment property/tax deduction question  (Read 274 times)

CarlosMontegro

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Investment property/tax deduction question
« on: August 09, 2020, 04:51:23 PM »
Let's say I make 100K a year in my day job, and I have extremely low deductible expenses (I give some stuff to goodwill now and then).  So I take the 12,000 standard deductible.

Then, let's say I buy an investment property and I have 3,000 in annual expenses I can deduct.  Does that count directly against the taxes on the rental income, and I still take the standard deduction on my taxes, effectively deducting 15,000?  Or would I just take the standard deduction and I have no tax benefit at all?

CarlosMontegro

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Re: Investment property/tax deduction question
« Reply #1 on: August 09, 2020, 04:56:27 PM »
Another question, if I can deduct money for repairs, and I can depreciate the structure, does that mean I'm essentially double-dipping if I have to replace the roof?  Theoretically I've been depreciating that every year, and then the year I replace it, it is one giant deductible expense?

secondcor521

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Re: Investment property/tax deduction question
« Reply #2 on: August 09, 2020, 07:13:35 PM »
Let's say I make 100K a year in my day job, and I have extremely low deductible expenses (I give some stuff to goodwill now and then).  So I take the 12,000 standard deductible.

Then, let's say I buy an investment property and I have 3,000 in annual expenses I can deduct.  Does that count directly against the taxes on the rental income, and I still take the standard deduction on my taxes, effectively deducting 15,000?  Or would I just take the standard deduction and I have no tax benefit at all?

Not an expert, but...

Assuming you don't have any sort of business structure and you just own a rental property, there isn't any such thing as "taxes on the rental income".  The income and expenses from the rental will all be put on a Schedule E which will go with your personal 1040.  The bottom line there will then carry over to one of the first few lines on your 1040.

The $3000 in rental expenses will generally offset the rental income.  Whatever net gain or loss on the rental income is becomes part of your gross income.  From that you can take the standard deduction.

So if you had $20K in rent and $3K in expenses, you'd add $17K to your gross income, from which you could then subtract your standard deduction of ~$12K.

secondcor521

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Re: Investment property/tax deduction question
« Reply #3 on: August 09, 2020, 07:28:45 PM »
Another question, if I can deduct money for repairs, and I can depreciate the structure, does that mean I'm essentially double-dipping if I have to replace the roof?  Theoretically I've been depreciating that every year, and then the year I replace it, it is one giant deductible expense?

Still not an expert, but:

When you spend money on your rental, you can either treat it as maintenance/repairs or improvements.  Check the instructions for Schedule E, but generally maintenance and repairs are what they sound like (like paint, carpet, replacing a water heater).  Improvements are things that would add value to the property (like a new garage or a new fence).

If you do maintenance or repairs, those are deducted as an expense on Schedule E in the year that you paid for them, and they reduce the rental income for that year.  See line 14 of Schedule E.  I would think that a roof replacement would fall under maintenance, although if you upgraded the shingles then you'd probably have to split the cost between maintenance and improvement.

If you do an improvement, then that adds to the basis of the property.  You can depreciate the property every year on a given schedule - rentals appear to be a straight 27.5 schedule - so you would take the basis of the property and put depreciation of 1/27.5 of that amount every year on line 18 of Schedule E.  If you make a capital improvement, then I'm not sure but I think you either have to depreciate that capital improvement on a separate schedule - I think you can find the answer to this question in IRS Pub 527.

In looking at a roof specifically, it may fall under Section 179, which means that you can depreciate it all in the first year of service, which essentially makes it like an expense in the current year rather than something that gets depreciated over several years.  See instructions for Form 8962.

Do note that once you go to sell, that depreciation - whether you take it or not - does get subject to depreciation recapture - you essentially have to pay a tax on the total amount of depreciation once you sell it.

Finally, you'll also have to apparently split the value of the land and building and only depreciate the building on that 27.5 year schedule.  Land doesn't depreciate.