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I was thinking about getting a home loan, buying a duplex, leasing one side out and living in the other side myself. My question is... would I have to pay income tax on a quarterly basis for the side I'm leasing out?

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Quarterly tax payments are required if your withholding isn't enough to avoid penalty.

If you buy a rental property and manage to have say, $5000 in profit, after all expenses and depreciation, you'd owe $1250 in tax in the 25% bracket. Whether this is enough to trigger a penalty is the question. If you have other income, you can simply adjust the withholding there to balance this.

To clarify a bit, this is the brief list of deductions, see Schedule E for the longer list, and actual form.

  • Advertising
  • Cleaning and Maintenance
  • Mortgage interest
  • Repairs
  • Real Estate Taxes
  • Utilities
  • Depreciation

Keep in mind - replacing a fridge or dishwasher is not a repair, it takes on its own depreciation schedule (See Pub 527, table 2-1) of 5 years. Depreciation must be taken each year, and in many situations will wipe out the gain for tax purposes. Keep in mind, this lowers your basis each year, setting you up for tax due when you sell, even if the value remains flat.

I suggest you buy tax software or use free online sw, and start to estimate your expenses and income. It will give you an idea how this all works even if the exact numbers aren't correct.

  • Does property tax count as an expense? – neubert Aug 16 '14 at 0:08
  • I recommend you look at a copy of Schedule E. Mortgage interest, Property tax, repairs on the rental side, insurance are the top expenses I can thing of. Plus you take depreciation, even though it's not really out of pocket. – JoeTaxpayer Aug 16 '14 at 0:30
  • Assuming your other employment situation hasn't changed, there may not be a penalty the first year. This is because your withholding + estimated payments only need to be enough to cover last year's taxes (or last year's tax + 10% if you make over $150k). – Nathan Grigg Aug 16 '14 at 12:50
  • @NathanGrigg - right, and with a bit more elaboration, you can offer a full answer if you wish. Addressing the rules of when/why penalty kicks in. – JoeTaxpayer Aug 16 '14 at 13:18
  • @JoeTaxpayer - how would this apply to someone who doesn't have income and an IRS $10,500 standard deduction. Would only fica/ss self-employment taxes be required quarterly, but no state or federal ? (up to the first $10K profit I mean). On that thought, does your 25% bracket, also include the 15% self employment taxes, or is rental income not subject to 'self employment' taxes ? Or would the yield on $5000 - 1250 -750 (fica) = $3000 return after taxes – Knuckle-Dragger Mar 24 '15 at 19:23
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I think your real question is: "Can I avoid paying quarterly taxes in my situation". The answer is probably "yes". If you calculate your profits and taxes owed, you can have your employer withhold the extra taxes from your paycheck (assuming you're not self-employed, etc.). You'll still have to do yearly taxes and details then, but if you don't want that headache, just having a little extra withheld can save you the trouble.

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