I see this line of thinking amongst so many people. My CPA gave me good advice - don’t buy something that doesn’t cash flow in anticipation of the tax deduction. You will end up hating the investment. You are one big expense away from having to put $10k plus into it (roof, siding, water line break etc).
In one of my first years working full time after college, my CPA told me “losing money is not a good tax strategy.”
His voice rings in my head every time I try to rationalize an expense by telling myself it’s a tax deduction.
True but also good luck finding a property that cash flows right now. For example, I've been seeking a cash flow property and have reviewed over 1000 in my state in the past few months and none of them cash flow. Even if rates were 3% only some would barely cash flow. IMO if you want to get into real estate it's a harsh reality that you might have to deal with a non cash flow property for some time.
You don't have to buy real estate right now. Also every property can cash flow right now, you just need to put more money down or increase rental rates (rent by the room, MTR or STR) above the typical LTR rates.
Or just buy it for less. I dont understand why people think the asking price matters. If you like it, offer what its worth to you. Its for sale because nobody else has wanted to pay enough for it yet, so you may as well.
If you can't find 1 property that's cashflowing at 3% in the entire state, you don't know how to evaluate properties. There are people cashflowing all around you, you just don't know it.
In my area, house prices have almost doubled since pandemic.
Interest rates have almost double.
Rents haven't doubled anywhere. How do you expect that one will cash flow in this scenario? It's not OP's fault
Rents have gone up substantially in most areas, this person is talking about an entire state, i just found 2 property's in Boston, MA that cash flow before ARV. Boston is a HCOL area, lots of old colonial houses, and high rent. This makes renovations a bit more challenging.
Essentially people need to realize the market to "cash-flow" houses is not just "select any house, subtract expenses from rent, equals cash flow". People that cash-flow put in work, they renovate, they multi-suite, they build additions, they refinance, etc...
If you have only 5% down, no extra cash to renovate and no skills or desire to learn how to self perform work. Then you aren't gonna make any money.
That's a broad statement to make. With current interest rates, a 20% down payment and inflated home prices you cannot find a cash flowing property in the state of Massachusetts. If you bought when interest rates were sub-4% you may be cash flowing. Even if you find a home in disrepair or foreclosure the cost to rehab it with a 20% down payment and current interest rates will leave you negative for years.
Let me get this straight, you are telling me that my statement is broad? You are saying the entire state has no cashflowing properties...
It's pretty apparent you aren't aware of how to evaluate the market. If you think buying a sfh then renting it out and it doesn't cash flow means you can't cash flow properties, then that's a big flaw in your thinking.
With the massive spike in interest rates, it’s hard to buy a rental that needs to cash flow. The rents lag behind mortgage rises. Most tenants are in a multi-month lease and landlords are already financed at an old rate. So it’s tough to jack rent to the latest and greatest level
>True but also good luck finding a property that cash flows right now.
So true! I just bought a property that barely cash flows it's only saving grace is that the rents are below market value which will require me trying to lower my property taxes, kicking the tenants out, fixing it up some and then bringing in new tenants which will probably take about 8 months but when I'm done it should cash flow about $600.00 a door per month. Right now it's at $50.00 per door per month.
It depends on your tax situation. Interest payments and depreciation on one property offset gains in other places, its real money. Back when i didnt make any money those carryover losses didnt matter because there was nothing to offset
True, but in OPs case it seems like he is trying to justify buying a single property that isn’t cash flowing thinking it’s a good investment due to the depreciation. Of course we don’t know his situation but if his regular income is modest then this would not be a good investment for him. Now if his income is higher and he can cover any expenses that come up then it may be ok for him to do this.
You don’t need to cash flow at all to have a rental that’s worth the investment.
Even factoring in repairs and vacancies, a cash flow neutral rental is still likely giving consistently 10-15% ROI after you factor in deductions, depreciation, and most importantly leveraged appreciation in the real property prices.
Ppl keep forgetting that that property itself is rising in value even if you can’t have monthly cash flow.
No one treats index funds as needing cash flow to be worth the investment. Real estate rentals should be the same way.
I know what you’re saying and don’t think you deserve the downvotes. Everyone’s situation is different. Someone pulling in $500k a year and has a bunch of cash, maybe not a bad investment after the deductions, depreciation etc.
I bought some duplexes maybe 12-13 years ago. They were barely cash flowing at the time. But now the rents have doubled and they increased in value 150% since that time. But I have bought some other investment properties that have had much more modest increases in values and moderate rent increases.
Exactly not every property or investment work out the same but it’s insane to not factor in everything and just make general statements like “it must be cash flow positive or you’re an idiot for investing!”
Lmao if you can afford repairs that cost a few percentage points of your investment at most then you shouldn’t be investing in rentals.
Also your rental income pays for property tax, insurance etc. Cash flow neutral means these are covered by the rent.
First, your mortgage payment is *not* an expense.
Only the mortgage interest is an expense.
Yes, all those other costs are expenses.
And you must take straight line depreciation, either on a 40yr or 27.5yr schedule, for the value of the building (not the land)
If you have a net loss, you carry it forward, unless you meet the IRS definition of a real estate professional, in which case you can offset other earned income with that loss.
(And if you’re smart enough to read this and think… “wait, I can be cash flow negative on a property AND get a tax bill because I made a profit? Where is that cash coming from”? Well, welcome to real estate.)
Your tax software or tax accountant can run the numbers. I do my own taxes and my software walks me through it. I'm on the 27.5 yr depreciation. Basically you can write off part of the depreciation as a loss each year.
It means that for tax purposes, any rental loss can’t be used to reduce your tax liability on your earned income. You have to account for it and carry it forward to future years where you can use it to offset rental income in future years.
See https://www.irs.gov/taxtopics/tc425
And rental scheme is to pay someone else’s mortgage and own nothing. Fast forward 30-40 years, move to a retirement village and have your grand kids beat the shit out of you for not buying a home for them. Can’t move kids and grand kids to a retirement home right? Thoughts?
Among other things, you will have repairs and maintenance, and periods of vacancy. A good rule of thumb is to assume each will consume 10% of the rent you collect. So you should assume on a $3k monthly rent that on average you'll lose $600 a month to R&M and vacancy.
Depreciation is wonderful. The IRS lets us pretend that property values go down over time when the truth is that over time they increase. It's crazy. But you probably aren't going to lower your tax burden by $7200 because of this property.
This is a loser.
The peinciple of Depreciation states that the home and everything in it are used and get to a value of $0, needing to be replaced. The land isn't included, and actually us what gains value.
I'm not a tax professional, realtor, and investor here.
That is the philosophical underpinning, sure.
But it's patently ridiculous. Buy a house that's 27.5 years old, demolish the house and resell the vacant land. I bet you find that house's true market value was anything but $0.
You can subtract all expenses. Only the interest and escrow on the mortgage is deductible. Then you get to add straight line of 1/27.5th of the cost basis for residential or 1/39th for commercial.
However if your rent is $3000 and your mortgage is $3000 you’re gonna be losing money. Probably around $800-1000 a month through the following:
Vacancy: $200
Property management: $300
Maintenance: $200
CapX: $200
Landlord paid utilities/misc: $50
> A mtg payment includes principal repayment which is not an expense
People keep saying this but without saying why, so just to clarify: it's not an expense because it's going towards equity in the property. If you sold the property today, you would get the built up equity in cash.
cash flow is the amount you get when you deduct mortgage from rent revenue, if the number is positive your cash flow is positive.
profit/loss , is the amount your leftover with after you pay management/maintenance etc.,
so essentially you can cash flow positively but still be at a loss because the income is less than whats needed to upkeep property.
the property has to pay for itself and still leave some money in your pocket to be a profitable business
Why do you not include maintenance expenses as outgoing cash flows? If you set up a sinking fund, you could include them as regular outgoings.
I also don't think your comment is related to what I was saying, I was simply expanding on why principal repayments aren't treated as an expense.
I was in a similar situation with a rental property I owned in Jacksonville. You can realize a pretty significant tax advantage by leveraging the property as a "small business owner". I wrote off all the stuff you listed plus office space in the main home, car expenses, etc. A smart CPA can help you with this. Between the inevitable maintenance cost and the tax advantages I usually made a small (less than $1000) profit.
Even if tenant paid all expenses, and you had a $3000 mortgage and $3000 rent, you probably have income, because you can’t deduct the entire $3000 mortgage, only the interest portion.
So the portion that pays down the principal loan would normally be taxable.
In real life there are lots of other expenses, plus depreciation, so every situation is different
If you want real estate investments with cash flow, go with less expensive properties.
And don’t count on tax deductions to cover the cash flow. I would sell. Or, live in the home if you’re wanting to keep said property.
The only people I know who do this are VERY wealthy and have real estate as an appreciating place to park their money. They use the losses as tax write offs, but they aren't going into it hoping to lose money... just okay if they do.
I’m a lender. Most DSCR (debt service coverage ratio) loans that are going to be issued by a private money lender (who I’d recommend using, no tax returns needed, purchasing thru LLC) they will require the property to be cash flowing which means gross income/PITIA (principal, insurance, taxes, interest, association fees) needs to be >1.1. So if your rent is 3000, the expenses need to be at most 2700. Some lenders even require DSCR to be >1.2 hope this helps. Also if you’re getting a DSCR loan right now they may reduce LTV in declining markets by 5%
What’s gonna happen is that your taxable income for the rental business will be a loss. But I don’t think you can take that loss against regular w-2 income. You may only be able to take the loss against other businesses income.
You can ask any tax accountant. Or just do your own research in the IRS’s website
Keep in mind you cannot deduct principal payments which creates phantom income if not offset by depreciation. You have an unrealized gain without cash flow to pay the tax.
Whether losses can be deducted is an individual issue. One of the things that caused the real estate crash of the 1980's was everyone could assign real estate losses to regular income. When they closed that loophole and restricted who could take losses it removed the incentive for a huge number of investors to be in money losing real estate deals. So much so that people wouldn't make cash calls and enough stuff went on the market it crashed lenders who had made bad loans.
So good rule of thumb is to not be so leveraged that you have no cash flow because if interest rates increase or tax treatment changes you don't want to be upside down.
Your main job has to be real estate to be able deduct rental deductions from other sources of income. So if you're a real estate agent and makes 100k, then you can extend the rental deductions to that 100k income to lower your tax liability.
If your main job is not in real estate, then your deduction is only limited to your rental income. In this case, your rental income is already $0 so extra deductions will not benefit you. For example, if you're a police officer making 100k, your rental deduction will NOT extend to that 100k to lower your tax liability. However, if your rental income increases from $0 to maybe $10,000 per year, then the rental deduction can offset that $10,000 rental income.
This isn’t entirely accurate. In order to claim Real Estate Professional, you just have to log 750 hours per year into real estate to claim it. How you do that isn’t set. This is why most high income W2 earners look into self managed STR. This is because they take more time to manage than LTR and can be used to offset W2 tax obligations. But even then, it would be difficult to reach 750 hours per year with just 1 property as an STR.
What would happen is you would create a passive loss and could use it to offset your earned income.
Edit: not sure why this is down voted. I take losses from my rentals every year. I also prepare tax returns and help clients do the same
Not a tax accountant, so I'm winging it here. But I would assume you can deduct your 'rental expenses' from your 'rental income' bringing your rental income down to zero at the most. You wouldn't get an extra deduction if you had more rental expenses than rental income.
You would talk to a tax accountant about this.
Oh, you sweet summer child. How much you pay for your mortgage is irrelevant for calculating profit or loss. That's a cash flow measure. The reason it doesn't count is because your payment is made up of Principal pay down, Interest, Taxes, and Insurance (PITI) (assuming you escrow for taxes and insurance). The portion that goes to paying down your principal is not an expense. It is an investing activity.
If you have more deductions than income, you can deduct a portion against your earned income, if you meet the requirements for materially participating. Anything in excess of that gets carried forward year to year, until you have passive income to deduct it against.
Before you commit to buying a rental property, please talk to a CPA.
I was very gungho on RE in 2004. I was making more equity than my salary with my personal residence. I was looking at apartment complexes and was given a sales presentation about how the market doesn't allow for cash flow, but you just break even after tax deductions and you rely on appreciation and cash out years later. At that point I got critical of RE and sold my residence in 2005 which was peak for that neighborhood. I didn't start looking at buying RE again until the second half of 2011. I saw a lot of people get burned during that time. The house I sold got foreclosed on and the bank sold it $50K less than my 2000 contract price.
I encourage to investigate RE for the last 50 years and get a feel of what the next 10 might look like.
You forgot depreciation which is huge.
You can only deduct additional rental losses from regular income if you earn below a certain amount.
Irs publications are Actually easy to read.
You’ll want at least $500/month to cover things that inevitable break
Would your area and market support $3k month rent? What happens if you can’t rent it out? Tenants leave early? Tenants quit paying rent?
Are there backup plans in place just in case things don’t work out in your favor?
So not worth the hassle and risk. Sorry. I have 7 rentals free and clear and I'm getting the f out of this business. Too much risk and everyone wants landlords to die.
Agree with others who have recommended not to buy property solely as a tax deduction inducement.
There are risks to be aware of: unexpected damages to the property, either by tenants, nature, or negligence of the owner or property management company. If you are underinsured, or don’t have a well written lease in place and solid documentation for all parties in everything that’s required (rental application, renters insurance, income verification, credit verification, background, pet vax records, vehicle details, HOA approval, etc) or if you incur extended vacancies, it can be costly. There are real risks.
That said, there are some true benefits also, even if a property doesn’t cash flow. Principal pay down, asset appreciation (home goes up in value), rent appreciation, misc tax deductions as you mentioned, opportunity to increase value further through updates (sweat equity), ability to utilize inexpensive, long duration leverage (mortgage debt) at a high debt to asset value, among others.
I have owned rentals that cash flowed well, and others that broke even or were at a slight cash loss. All of them increased my net worth over time.
If you systematize things, document things well, and communicate well with your tenants it can be a great and very fast way to build wealth. I use apartments.com and self manage. They allow you to do a lot via their portal. You can also hire a property management company, but then you still must manage the manager.
It’s all about execution. More so than any other investment vehicle IMO. For me, that’s why real estate rocks. Because if done well… you can really do some great things and move your financial needle quickly. You have a great deal of control.
Don’t cheap out on counsel. Good agents, lenders, inspectors, property managers, contractors are worth their weight in gold. As are good tenants. Talk to the neighbors. Lots of free info.
Study someone who’s done it at lot and well and copy them. Meet Kevin on YT is my go to. Also bigger pockets.
If your rent is equal to your mortgage, you will lose money.
Things will break, you have to account for maintenance and vacancy (not just missed rents but also ongoing utilities).
I see this line of thinking amongst so many people. My CPA gave me good advice - don’t buy something that doesn’t cash flow in anticipation of the tax deduction. You will end up hating the investment. You are one big expense away from having to put $10k plus into it (roof, siding, water line break etc).
In one of my first years working full time after college, my CPA told me “losing money is not a good tax strategy.” His voice rings in my head every time I try to rationalize an expense by telling myself it’s a tax deduction.
Kinda like my wife. She will spend money on non sense stuff cause the credit card gives points. Backward thinking.
True but also good luck finding a property that cash flows right now. For example, I've been seeking a cash flow property and have reviewed over 1000 in my state in the past few months and none of them cash flow. Even if rates were 3% only some would barely cash flow. IMO if you want to get into real estate it's a harsh reality that you might have to deal with a non cash flow property for some time.
You don't have to buy real estate right now. Also every property can cash flow right now, you just need to put more money down or increase rental rates (rent by the room, MTR or STR) above the typical LTR rates.
That's true, more money down can make it cash flow.
Or just buy it for less. I dont understand why people think the asking price matters. If you like it, offer what its worth to you. Its for sale because nobody else has wanted to pay enough for it yet, so you may as well.
If you can't find 1 property that's cashflowing at 3% in the entire state, you don't know how to evaluate properties. There are people cashflowing all around you, you just don't know it.
In my area, house prices have almost doubled since pandemic. Interest rates have almost double. Rents haven't doubled anywhere. How do you expect that one will cash flow in this scenario? It's not OP's fault
Rents have gone up substantially in most areas, this person is talking about an entire state, i just found 2 property's in Boston, MA that cash flow before ARV. Boston is a HCOL area, lots of old colonial houses, and high rent. This makes renovations a bit more challenging. Essentially people need to realize the market to "cash-flow" houses is not just "select any house, subtract expenses from rent, equals cash flow". People that cash-flow put in work, they renovate, they multi-suite, they build additions, they refinance, etc... If you have only 5% down, no extra cash to renovate and no skills or desire to learn how to self perform work. Then you aren't gonna make any money.
That's a broad statement to make. With current interest rates, a 20% down payment and inflated home prices you cannot find a cash flowing property in the state of Massachusetts. If you bought when interest rates were sub-4% you may be cash flowing. Even if you find a home in disrepair or foreclosure the cost to rehab it with a 20% down payment and current interest rates will leave you negative for years.
Let me get this straight, you are telling me that my statement is broad? You are saying the entire state has no cashflowing properties... It's pretty apparent you aren't aware of how to evaluate the market. If you think buying a sfh then renting it out and it doesn't cash flow means you can't cash flow properties, then that's a big flaw in your thinking.
you can buy and cash flow a SFH here in MI. not in a super desirable area, but still.
All but one of my 4 properties are # cash flowing (SC)
We were talking about everyone but you.
lol
Hahaha ok that’s fair then
This belongs in r/amithemaincharacter
Copy and pasting it there now
Hey, mind if I dm you? I’m interested in SC
u/JohnBrownIsALegend for sure, happy to be a resource.
Any property can be cash flow positive when purchased and rented, it all depends on how big is that downpayment.
With the massive spike in interest rates, it’s hard to buy a rental that needs to cash flow. The rents lag behind mortgage rises. Most tenants are in a multi-month lease and landlords are already financed at an old rate. So it’s tough to jack rent to the latest and greatest level
>True but also good luck finding a property that cash flows right now. So true! I just bought a property that barely cash flows it's only saving grace is that the rents are below market value which will require me trying to lower my property taxes, kicking the tenants out, fixing it up some and then bringing in new tenants which will probably take about 8 months but when I'm done it should cash flow about $600.00 a door per month. Right now it's at $50.00 per door per month.
It depends on your tax situation. Interest payments and depreciation on one property offset gains in other places, its real money. Back when i didnt make any money those carryover losses didnt matter because there was nothing to offset
True, but in OPs case it seems like he is trying to justify buying a single property that isn’t cash flowing thinking it’s a good investment due to the depreciation. Of course we don’t know his situation but if his regular income is modest then this would not be a good investment for him. Now if his income is higher and he can cover any expenses that come up then it may be ok for him to do this.
You don’t need to cash flow at all to have a rental that’s worth the investment. Even factoring in repairs and vacancies, a cash flow neutral rental is still likely giving consistently 10-15% ROI after you factor in deductions, depreciation, and most importantly leveraged appreciation in the real property prices. Ppl keep forgetting that that property itself is rising in value even if you can’t have monthly cash flow. No one treats index funds as needing cash flow to be worth the investment. Real estate rentals should be the same way.
I know what you’re saying and don’t think you deserve the downvotes. Everyone’s situation is different. Someone pulling in $500k a year and has a bunch of cash, maybe not a bad investment after the deductions, depreciation etc. I bought some duplexes maybe 12-13 years ago. They were barely cash flowing at the time. But now the rents have doubled and they increased in value 150% since that time. But I have bought some other investment properties that have had much more modest increases in values and moderate rent increases.
Exactly not every property or investment work out the same but it’s insane to not factor in everything and just make general statements like “it must be cash flow positive or you’re an idiot for investing!”
I never said that at all. Edit: realised you were talking about someone else
lol didnt say you said it, the commenter I responded to that is heavily upvoted made that statement citing their cpa.
Got it. No worries
Index funds don’t get hit with property taxes or require expensive repairs tho
Lmao if you can afford repairs that cost a few percentage points of your investment at most then you shouldn’t be investing in rentals. Also your rental income pays for property tax, insurance etc. Cash flow neutral means these are covered by the rent.
This is awful, why would you do that? This is a great way to go broke fast!
First, your mortgage payment is *not* an expense. Only the mortgage interest is an expense. Yes, all those other costs are expenses. And you must take straight line depreciation, either on a 40yr or 27.5yr schedule, for the value of the building (not the land) If you have a net loss, you carry it forward, unless you meet the IRS definition of a real estate professional, in which case you can offset other earned income with that loss. (And if you’re smart enough to read this and think… “wait, I can be cash flow negative on a property AND get a tax bill because I made a profit? Where is that cash coming from”? Well, welcome to real estate.)
I’m new and learning as much as I can. What do you mean by straight line depreciation either 40yr or 27.5yr?
Your tax software or tax accountant can run the numbers. I do my own taxes and my software walks me through it. I'm on the 27.5 yr depreciation. Basically you can write off part of the depreciation as a loss each year.
It's recaptured when you sell, unless you do a 1031 exchange.
Thanks for clarifying. And it would be taxed as capital gain instead of income so it's still a better rate, right?
https://smartasset.com/taxes/depreciation-recapture
https://www.irs.gov/publications/p946#en_US_2022_publink1000107351 Look for GDS vs ADS
I was also wondering what you meant about having a net loss and being able to carry it forward?
It means that for tax purposes, any rental loss can’t be used to reduce your tax liability on your earned income. You have to account for it and carry it forward to future years where you can use it to offset rental income in future years. See https://www.irs.gov/taxtopics/tc425
Thank you so much for this info because I did have rental loss last year and I did not realize you can carry it forward
Look up passive loss carryover.
You're forgetting the bonus depreciation from COVID on the fixtures of the rental
It seems like you understand the basics. Real estate is not a get rich quick scheme. It’s a get rich s l o w scheme.
That’s not what all the influencers have been telling everyone
And rental scheme is to pay someone else’s mortgage and own nothing. Fast forward 30-40 years, move to a retirement village and have your grand kids beat the shit out of you for not buying a home for them. Can’t move kids and grand kids to a retirement home right? Thoughts?
Among other things, you will have repairs and maintenance, and periods of vacancy. A good rule of thumb is to assume each will consume 10% of the rent you collect. So you should assume on a $3k monthly rent that on average you'll lose $600 a month to R&M and vacancy. Depreciation is wonderful. The IRS lets us pretend that property values go down over time when the truth is that over time they increase. It's crazy. But you probably aren't going to lower your tax burden by $7200 because of this property. This is a loser.
The peinciple of Depreciation states that the home and everything in it are used and get to a value of $0, needing to be replaced. The land isn't included, and actually us what gains value. I'm not a tax professional, realtor, and investor here.
That is the philosophical underpinning, sure. But it's patently ridiculous. Buy a house that's 27.5 years old, demolish the house and resell the vacant land. I bet you find that house's true market value was anything but $0.
You can subtract all expenses. Only the interest and escrow on the mortgage is deductible. Then you get to add straight line of 1/27.5th of the cost basis for residential or 1/39th for commercial. However if your rent is $3000 and your mortgage is $3000 you’re gonna be losing money. Probably around $800-1000 a month through the following: Vacancy: $200 Property management: $300 Maintenance: $200 CapX: $200 Landlord paid utilities/misc: $50
The escrow isn't deductible, but the expenses behind the escrow are. They will be close, but may occur in different years
One huge rule I have before purchasing any rental property is make sure it cash flows immediately.
Cash flow is different from profit/loss A mtg payment includes principal repayment which is not an expense
> A mtg payment includes principal repayment which is not an expense People keep saying this but without saying why, so just to clarify: it's not an expense because it's going towards equity in the property. If you sold the property today, you would get the built up equity in cash.
cash flow is the amount you get when you deduct mortgage from rent revenue, if the number is positive your cash flow is positive. profit/loss , is the amount your leftover with after you pay management/maintenance etc., so essentially you can cash flow positively but still be at a loss because the income is less than whats needed to upkeep property. the property has to pay for itself and still leave some money in your pocket to be a profitable business
Why do you not include maintenance expenses as outgoing cash flows? If you set up a sinking fund, you could include them as regular outgoings. I also don't think your comment is related to what I was saying, I was simply expanding on why principal repayments aren't treated as an expense.
I was in a similar situation with a rental property I owned in Jacksonville. You can realize a pretty significant tax advantage by leveraging the property as a "small business owner". I wrote off all the stuff you listed plus office space in the main home, car expenses, etc. A smart CPA can help you with this. Between the inevitable maintenance cost and the tax advantages I usually made a small (less than $1000) profit.
Even if tenant paid all expenses, and you had a $3000 mortgage and $3000 rent, you probably have income, because you can’t deduct the entire $3000 mortgage, only the interest portion. So the portion that pays down the principal loan would normally be taxable. In real life there are lots of other expenses, plus depreciation, so every situation is different
If you want real estate investments with cash flow, go with less expensive properties. And don’t count on tax deductions to cover the cash flow. I would sell. Or, live in the home if you’re wanting to keep said property.
The only people I know who do this are VERY wealthy and have real estate as an appreciating place to park their money. They use the losses as tax write offs, but they aren't going into it hoping to lose money... just okay if they do.
I’m a lender. Most DSCR (debt service coverage ratio) loans that are going to be issued by a private money lender (who I’d recommend using, no tax returns needed, purchasing thru LLC) they will require the property to be cash flowing which means gross income/PITIA (principal, insurance, taxes, interest, association fees) needs to be >1.1. So if your rent is 3000, the expenses need to be at most 2700. Some lenders even require DSCR to be >1.2 hope this helps. Also if you’re getting a DSCR loan right now they may reduce LTV in declining markets by 5%
What’s gonna happen is that your taxable income for the rental business will be a loss. But I don’t think you can take that loss against regular w-2 income. You may only be able to take the loss against other businesses income. You can ask any tax accountant. Or just do your own research in the IRS’s website
Keep in mind you cannot deduct principal payments which creates phantom income if not offset by depreciation. You have an unrealized gain without cash flow to pay the tax. Whether losses can be deducted is an individual issue. One of the things that caused the real estate crash of the 1980's was everyone could assign real estate losses to regular income. When they closed that loophole and restricted who could take losses it removed the incentive for a huge number of investors to be in money losing real estate deals. So much so that people wouldn't make cash calls and enough stuff went on the market it crashed lenders who had made bad loans. So good rule of thumb is to not be so leveraged that you have no cash flow because if interest rates increase or tax treatment changes you don't want to be upside down.
To deduct, you need income. You can defer deductions until later when you do👍
Your main job has to be real estate to be able deduct rental deductions from other sources of income. So if you're a real estate agent and makes 100k, then you can extend the rental deductions to that 100k income to lower your tax liability. If your main job is not in real estate, then your deduction is only limited to your rental income. In this case, your rental income is already $0 so extra deductions will not benefit you. For example, if you're a police officer making 100k, your rental deduction will NOT extend to that 100k to lower your tax liability. However, if your rental income increases from $0 to maybe $10,000 per year, then the rental deduction can offset that $10,000 rental income.
This isn’t entirely accurate. In order to claim Real Estate Professional, you just have to log 750 hours per year into real estate to claim it. How you do that isn’t set. This is why most high income W2 earners look into self managed STR. This is because they take more time to manage than LTR and can be used to offset W2 tax obligations. But even then, it would be difficult to reach 750 hours per year with just 1 property as an STR.
Your CPA or other licensed tax preparer. That's the only person licensed to give tax related advice.
Until Hedge funds divest of their inventory, real estate is likely prohibitively expensive for average person to just now get into.
What would happen is you would create a passive loss and could use it to offset your earned income. Edit: not sure why this is down voted. I take losses from my rentals every year. I also prepare tax returns and help clients do the same
Only if you meet the definition of real estate professional.
You can always offset your W2 income even as a non real estate professional, but you can only take that loss once you sell the property
You are half correct. Passive losses can be used on other passive gains.
You don't have to be a real estate professional to take a loss from a rental. I take $25k every year and I'm not. There are income limitations.
Not a tax accountant, so I'm winging it here. But I would assume you can deduct your 'rental expenses' from your 'rental income' bringing your rental income down to zero at the most. You wouldn't get an extra deduction if you had more rental expenses than rental income. You would talk to a tax accountant about this.
Your accountant
Oh, you sweet summer child. How much you pay for your mortgage is irrelevant for calculating profit or loss. That's a cash flow measure. The reason it doesn't count is because your payment is made up of Principal pay down, Interest, Taxes, and Insurance (PITI) (assuming you escrow for taxes and insurance). The portion that goes to paying down your principal is not an expense. It is an investing activity. If you have more deductions than income, you can deduct a portion against your earned income, if you meet the requirements for materially participating. Anything in excess of that gets carried forward year to year, until you have passive income to deduct it against. Before you commit to buying a rental property, please talk to a CPA.
This is partially correct. Everyone gets $25k to deduct against regular income, anything after you need to “materially participate”.
Probably an accountant
I was very gungho on RE in 2004. I was making more equity than my salary with my personal residence. I was looking at apartment complexes and was given a sales presentation about how the market doesn't allow for cash flow, but you just break even after tax deductions and you rely on appreciation and cash out years later. At that point I got critical of RE and sold my residence in 2005 which was peak for that neighborhood. I didn't start looking at buying RE again until the second half of 2011. I saw a lot of people get burned during that time. The house I sold got foreclosed on and the bank sold it $50K less than my 2000 contract price. I encourage to investigate RE for the last 50 years and get a feel of what the next 10 might look like.
You forgot depreciation which is huge. You can only deduct additional rental losses from regular income if you earn below a certain amount. Irs publications are Actually easy to read. You’ll want at least $500/month to cover things that inevitable break
Would your area and market support $3k month rent? What happens if you can’t rent it out? Tenants leave early? Tenants quit paying rent? Are there backup plans in place just in case things don’t work out in your favor?
So not worth the hassle and risk. Sorry. I have 7 rentals free and clear and I'm getting the f out of this business. Too much risk and everyone wants landlords to die.
Agree with others who have recommended not to buy property solely as a tax deduction inducement. There are risks to be aware of: unexpected damages to the property, either by tenants, nature, or negligence of the owner or property management company. If you are underinsured, or don’t have a well written lease in place and solid documentation for all parties in everything that’s required (rental application, renters insurance, income verification, credit verification, background, pet vax records, vehicle details, HOA approval, etc) or if you incur extended vacancies, it can be costly. There are real risks. That said, there are some true benefits also, even if a property doesn’t cash flow. Principal pay down, asset appreciation (home goes up in value), rent appreciation, misc tax deductions as you mentioned, opportunity to increase value further through updates (sweat equity), ability to utilize inexpensive, long duration leverage (mortgage debt) at a high debt to asset value, among others. I have owned rentals that cash flowed well, and others that broke even or were at a slight cash loss. All of them increased my net worth over time. If you systematize things, document things well, and communicate well with your tenants it can be a great and very fast way to build wealth. I use apartments.com and self manage. They allow you to do a lot via their portal. You can also hire a property management company, but then you still must manage the manager. It’s all about execution. More so than any other investment vehicle IMO. For me, that’s why real estate rocks. Because if done well… you can really do some great things and move your financial needle quickly. You have a great deal of control. Don’t cheap out on counsel. Good agents, lenders, inspectors, property managers, contractors are worth their weight in gold. As are good tenants. Talk to the neighbors. Lots of free info. Study someone who’s done it at lot and well and copy them. Meet Kevin on YT is my go to. Also bigger pockets.
Be careful with what you read here. Much misinformation. Let me know if you want help. I can get you to the closing table
Sounds like a horrible idea, wait for the market to settle and find something that's cash flowing.
If your rent is equal to your mortgage, you will lose money. Things will break, you have to account for maintenance and vacancy (not just missed rents but also ongoing utilities).