Tax Implications of Renting a property

Question

I am thinking of buying a condo and renting it out.

Let's say I buy it for $200k, and then put it up for rent at $1500/mo. I have to pay $500/mo in HOA dues + property taxes. How much tax do I owe at end of the year?

This is in state of WA, USA

Answer 1

Your taxable income is the net of your rent income minus all the rental-related expenses and the depreciation. It can be positive or negative (for high-cost low-rent producing property - depreciation makes it a negative).

Some expenses may only be allowed if its a full time rental. For example, you cannot have negative income on your tax return for your vacation home or dual-use property (property that is both rental and personal use). That is likely not the case for you, as you're talking about investment property.

In case of a condo, the land portion of the home value is not very large, I'd say about 50%, from my experience in California. This, however, varies a lot between different locations. While in the San Francisco Bay Area the land is quite expensive, in Washington it may not be so. Check with a local realtor and your tax assessor (they may provide the division, at least in California they do). If only 50% is depreciable, you'll be able to deduct for depreciation about $3640 a year.

You'll have to check with the county what are the taxes. Assuming you live in the city of Washougal of the Clark County, your tax will be about 1.85% of the value. So of the 200K, you'll pay ~$3700. Check your county for information specific to the condo, it was just an example.

So lets play with your numbers:

Home Value: $200K (50/50 land/building).
Rent Income: $18000 (1.5K a month)
Rent Expenses:    
   HOA: $6000
   taxes: $3700
   Insurance: $300 (guessing, assuming HOA includes insurance for the building)
   Total: $10000
Net cash income: $8000
   Depreciation: $3640
Net tax income: $4360

How much tax you're going to pay depends on your personal marginal tax bracket. This is current ordinary income, i.e.: it's taxed like your salary or short term capital gains (when its positive, when tax income is negative there are special rules for rentals).

Of course, you'll have additional expenses. Look at Schedule E categories. You'll pay for advertising and screening tenants, repairs and maintenance, maybe property management, maybe additional bills (especially between tenants), etc. Occupancy is probably not going to be 12 months either, as I calculated, but less. So its not unheard of to have negative tax income for a rental with positive cash flow. Especially if you have a mortgage involved.

Good luck!

Answer 2

The IRS has a book just for Residential Rental Property

Listed below are the most common rental expenses.

• Advertising.
• Auto and travel expenses.
• Cleaning and maintenance.
• Commissions.
• Depreciation.
• Insurance.
• Interest (other).
• Legal and other professional fees.
• Local transportation expenses.
• Management fees.
• Mortgage interest paid to banks, etc.
• Points.
• Rental payments.
• Repairs.
• Taxes.
• Utilities

Depreciation is the hardest to calculate. You have to know the starting value for the property (but not the land), and know which month it went into service.

Most people don't realize that the principal portion of the loan payment isn't deductible.