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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

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    You haven't provided enough information. How much tax you pay will largely depend on how much your total income is for the year and what your personal tax rate is based on that income. – Victor Sep 28 '13 at 20:53
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    Mortgage or a cash deal? This makes a difference, of course, – JoeTaxpayer Sep 28 '13 at 21:20
  • cash deal. @victor: i just want to know what will be my taxable income from the rental property – morpheus Sep 28 '13 at 22:18
  • @Morpheus - you asked in your question how much tax you would owe at the end of the year not your taxable income. Your taxable income from the rental property is simply your income (rent) minus your expenses including any depreciation. – Victor Sep 29 '13 at 21:23
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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!

  • Because its a condo, and not a house on a large piece of land, the building/land ratio is likely far higher, as high as 80-90% building, in my experience. – JoeTaxpayer Sep 29 '13 at 2:59
  • @Joe I have a condo, and per the county tax assessor its 50/50, that's where I came up with the division. But as I said - someone in the real-estate business should provide the numbers as relevant to the specific location. Updated to emphasize that it varies a lot. – littleadv Sep 29 '13 at 3:05
  • @littleadv first of all thank you very much for your answer. i have already included property tax in the $500/mo i quoted. so what is the $3700 for? – morpheus Sep 29 '13 at 5:12
  • @morpheus I read as if $500 is the HOA and on top of it is the property taxes. Sorry for misunderstanding, but again - that's just an example to show how to do the math. No-one knows your expenses better than you do. – littleadv Sep 29 '13 at 6:33
  • @littleadv - understood. I'm at the other extreme a townhouse with little land, and nearly 90% going to building value being depreciated. OP needs to research this to get it right. – JoeTaxpayer Sep 29 '13 at 14:43
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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.

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