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.

  • Dont forget maintenance and replacement – Joe S May 2 '19 at 16:55
  • 1
    Make sure to check comps in the area you considering to rent your home. Make sure 3950 is similar to the rental prices around your home. – Corey P May 2 '19 at 17:01
  • You can deduct up to 10% of property+income, and in CA you probably already hit that limit with income taxes. Though that's for primary residences, you might be able to deduct it as a business expense against the rent? Not sure about that part. – Kevin May 2 '19 at 17:17
  • Yeah it would be a business expense. – Androme May 2 '19 at 17:23
  • Do you pay any utilities/insurance? – Hart CO May 2 '19 at 20:34

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%.

  • Complicated stuff! Just one point, if you're renting out the house, the property tax on the house IS a deduction? – Fattie May 3 '19 at 14:37
  • @Fattie Yeah, in this case a business expense, so deduction from rental income, not an itemized personal deduction. – Hart CO May 3 '19 at 15:01
  • Gotchya, it makes sense. – Fattie May 3 '19 at 15:15

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.

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