USA Real estate taxing in the US for dummies

[jmail]

Hey guys,
I am new to this forum and in a huge need of help because I am a really big idiot when it comes to accounting...
I think all of you who understands it, or chooses it as a profession is incredibly smart!

So I was wondering if you please would be so kind and teach me a little bit about real estate taxation.

So, lets say we have a rental house that worth 150K, and rents for 1k per month. So yearly income from the rent would be 12K on the property.
Lets say I claim this rental on my personal taxes... Lets say I am in a 30 percent tax bracket, and lets say I make 100K per year.

1) How will that rental income be taxed?


2) My understanding, interest rate is deductible...Lets say I paid 5K in interest , then 100K ( my salary) minus 5 K of interest, =95K of taxable income...
So, if I understand it correctly, then 30% taxes will be taken from 95K, not 100K. Correct?

3) Then deprecation is helping to decrease taxes...If I understand it correctly, then the worth of the rental house ( 150K) is spread over a certain amount of years, I do not remember how many years, lets say for simplicity over 30 years...So, then 150K divide by 30 years, 5K per year I can subtract as well from my taxable income? So again, then 30% will be taken from 90K now (100K minus interest 5K minus depreciation 5K=90K)

4) Then repairs/management fee, etc...Lets say I spend 10K per year on that , then 90K minus 10K= I am left with 80K of taxable income, right?

5) Am I understanding it correctly? Am I missing anything else?

Please understand that you are talking to a not intelligent person ( I dont understand accounting and I dont know financial vocabulary), so will you please explain like you would be explaining to a dummy?
Thank you guys so much in advance!

 

[Drmdcpa]

You are mixing up a lot of issues. It would be virtually impossible to start anywhere given all the mixed matters.

But in general rental activity is separate and apart from personal income and deductions.

Overall based on what you provided, and ignoring all of the confusion brought about by blending activities, I would suspect the rental would not have positive taxable income, and thus would provide a tax benefit not a tax liability.

Given how confused you are, it would be better if you had a meeting with a CPA that could at least give you a foundation such that you could ask better questions.

 

[jmail]

You are mixing up a lot of issues. It would be virtually impossible to start anywhere given all the mixed matters.

But in general rental activity is separate and apart from personal income and deductions.

Overall based on what you provided, and ignoring all of the confusion brought about by blending activities, I would suspect the rental would not have positive taxable income, and thus would provide a tax benefit not a tax liability.

Given how confused you are, it would be better if you had a meeting with a CPA that could at least give you a foundation such that you could ask better questions.

Thank you...

 

[bklynboy]

Simply put for most people you take gross rent less what you spend to maintain the property (repairs, advertising, utilities, mortgage interest, legal costs, etc) and also take a deduction for depreciation. As long as your AGI is under 100K you can deduct up to 25K in losses. As you make more the 25K credit gets reduced and completely lost at 150K. If you are that lost on teh topic, google this area or get a tax accountant to do your taxes and review how he came up with the figures.

 

[jmail]

Simply put for most people you take gross rent less what you spend to maintain the property (repairs, advertising, utilities, mortgage interest, legal costs, etc) and also take a deduction for depreciation. As long as your AGI is under 100K you can deduct up to 25K in losses. As you make more the 25K credit gets reduced and completely lost at 150K. If you are that lost on teh topic, google this area or get a tax accountant to do your taxes and review how he came up with the figures.

thank u!
So let’s say I make 100 K on my W-2, and rent is 12k per year minus 2k in expenses, then 100K -10K =90K is what I will be taxed on, correct?

 

[Drmdcpa]

thank u!
So let’s say I make 100 K on my W-2, and rent is 12k per year minus 2k in expenses, then 100K -10K =90K is what I will be taxed on, correct?

No 12k - 2k = positive 10k adding to W-2. But in my original response I was estimating depreciation expense and other reasonable real estate rental costs based on information provided and experience. This estimating resulted in zero or negative rental income which is usually standard results for initial operations of rental properties even in areas of high rental rates like the San Francisco Bay area.

 

[jmail]

No 12k - 2k = positive 10k adding to W-2. But in my original response I was estimating depreciation expense and other reasonable real estate rental costs based on information provided and experience. This estimating resulted in zero or negative rental income which is usually standard results for initial operations of rental properties even in areas of high rental rates like the San Francisco Bay area.

Oh yeah, it makes sense! If I add 10K of rental income, they should increase my taxable income by 10k, since its income, not expense...Makes sense... Thank you so much!

So, if I am in a 30% tax bracket then I will be taxed like that: 100K (from W2) + 10K (rental income) =110K of taxable income...
Now, since I am in a 30% tax bracket, 110K times 0.3 = 33k is what I owe to IRS in taxes, right?

 

[jmail]

approximately...
It does not have to be exact...
I am just trying to understand concepts...

 

[Drmdcpa]

Your effective and marginal tax rates are not the same. Effective tax rate is what you actually pay. Marginal tax rate is tax on the next dollar.

When someone refers to a tax bracket, for example, the 32% Federal tax bracket, they are referring to the marginal rate. That means any dollar in that bracket is taxed at 32%. But dollars before that were taxed at either 0%, 12% or 22%. Because those brackets had to be filled up before the 32% was entered.

Under today's US Federal law, to have an effective rate of 30%, you would need to be nearing the 35% bracket without any state income tax.

If state income tax is involved, your overall effective rate estimate becomes more difficult because many states have there own special rules, depreciation functions that differ from the Fed depreciation functions, and graduated rate schedules.

 

[Drmdcpa]

Their own.

 

[jmail]

Your effective and marginal tax rates are not the same. Effective tax rate is what you actually pay. Marginal tax rate is tax on the next dollar.

When someone refers to a tax bracket, for example, the 32% Federal tax bracket, they are referring to the marginal rate. That means any dollar in that bracket is taxed at 32%. But dollars before that were taxed at either 0%, 12% or 22%. Because those brackets had to be filled up before the 32% was entered.

Under today's US Federal law, to have an effective rate of 30%, you would need to be nearing the 35% bracket without any state income tax.

If state income tax is involved, your overall effective rate estimate becomes more difficult because many states have there own special rules, depreciation functions that differ from the Fed depreciation functions, and graduated rate schedules.

Thank you...
Honestly, it does not matter to me if its 30 or 35, I am just trying to understand the concept... So, lets make an assumption that its 30%
do I understand correctly that in order to calculate I would add these two: 100K (from W2) + 10K (rental income) =110K of taxable income...
and then, since we made an assumption and decided to use the 30% tax braket, then in order to calculate the tax that I will owe I would need:
110K multiply by 0.3 = 33k is what I owe to IRS in taxes, right?

 

[bklynboy]

Thank you...
Honestly, it does not matter to me if its 30 or 35, I am just trying to understand the concept... So, lets make an assumption that its 30%
do I understand correctly that in order to calculate I would add these two: 100K (from W2) + 10K (rental income) =110K of taxable income...
and then, since we made an assumption and decided to use the 30% tax braket, then in order to calculate the tax that I will owe I would need:
110K multiply by 0.3 = 33k is what I owe to IRS in taxes, right?

Not so fast. That is your income. Then you deduct standard deduction (for most people)and whatever other credits/items you are entitled to. After you net all those items then you determine the tax rate to apply against that net result. Compare this against whatever was withheld through the year to determine what you owe or receive

 

[jmail]

thank you so much! You guys really helped me a lot!

 

[yoouika]

Overall based on what you provided, and ignoring all of the confusion brought about by blending activities, I would suspect the rental would not have positive taxable income, and thus would provide a tax benefit not a tax liability.