Break even for renting house in California

Question

Hi am trying to figure out what our break even would be for renting out my house in California. All the options with taxes can be a bit confusing so i wanted to ask if have calculated it correctly here. I know there is more to renting out a house such as repair savings and such, but i am mostly interested in the break even.

For my mortgage I pay roughly 2400 in interest and 800 in principal per month and my property tax is 9000 a year.

If i understand correctly, i can deduct the interest in taxes, so i should get roughly 30% of that back coming tax time. I am not sure about the property tax, would have act like a credit or also a deduction?

If it is a deduction need would need: 2400*12*0.7+9000*0.7=26460 a year, which means rent should be 2205 for the rental house to break even. Is this correct?

I would need (2400+800)*12+9000=47400 a year to have positive cash-flow, 3950 a month.

Answer 1

Expenses directly offset rental income so you don't have to think about tax implications for break-even on those. Principal payments are not deductible rental expenses, so you'd consider tax burden for those.

Deductible rental expenses:

• Interest - $2,400
• Property Tax - 750
• Insurance - ?
• Repairs/Maintenance - ?
• HOA - ?
• Utilities - ?
• Depreciation - ? (Price less land value / 27.5 / 12)
• .....

Non-deductible rental expense you want covered:

• Loan principal - $800

You've got a lot of blanks to fill in, but based on the numbers you have provided, if you rented for $3,950 each month you'd have $800/month in rental income totaling $9,600/year subject to income tax, at 30% that'd cost you $2,880 in income tax.

To have that $800 covered after taxes (at 30% tax rate) you'd need to charge an extra $342/month 800 / (1-.3) = 1142.9, so $4,292 monthly rent.

However, the above does not include depreciation. Depreciation is a non-cash expense, it affects cash flow by reducing current tax liability. If your depreciation was $800/month, you'd be back to only needing $3,950 to come out even after taxes. If depreciation exceeds $800/month and you are able to benefit from rental losses then you could need less than $3,950/month to come out even.

One thing to note about depreciation is that it is re-captured when you sell the house, so it's more deferring tax than avoiding it, but it is still valuable since a dollar today is typically more value than a dollar down the road.

Ultimately you will want to come up with a better estimate of total expenses, and remember that profit and cash flow are not the same thing.

There's also a 20% pass-through deduction that you might qualify for, which would reduce the amount of your rental income subjected to income tax by 20%.

Answer 2

Landlords can often also claim depreciation to further reduce taxes. As a result, in some cases, it may be possible for a property to have a loss for tax purposes but generate positive cashflow.

However, if the landlord's income is too high, it may not be possible to deduct a rental income loss.

The above is not tax advice, it is for general informational purposes only.