Rental Income Question - I'm going to be leasing my house

[Kremerica]

Hey all,
I have a question about how rental income is treated as it relates to my taxes.

I've read a whole lot about leasing, and becoming a landlord in other forums and in books and (haven't found the answer) here are a couple points that I see replies about:
-I know I need professional advice and I am seeking advice from a tax accountant, just wondering what the people would say on the board.
-I know being a landlord is tough, and I don't know anything... yada yada... I'm already committed, so no big deal.
-I live in Houston, Texas, USA

so...
My monthly mortgage payment is roughly $1380 with principal, interest, taxes.
I am renting the house for $1000 a month.

two scenarios that I am wondering about the outcome of...

1. theoretically, if I get my tenant to pay rent in cash, (which I know they will do, and I give them receipts and all that... so they are comfortable with paying cash)
and I don't report the income (again, theoretically speaking)
I would make $12k a year from the rent. and have no impact on taxes...
I know this scenario is highly illegal and breaking federal law, just wondering about it because it will help me grasp the next scenario...

2. The thing I really want to know...
If I rent the house for $1k/month, and my mortgage payments total $1380/month, I am operating at a loss of $380/month...
So if I report the income on my taxes, I make $12k/year and I also claim a loss of $4560 per year and get a direct tax credit to my AGI (Adjusted gross income) and I get to write off/take a deduction for any expenses related to the property correct?

So from a money/tax point of view, scenario 2 makes a whole lot more sense than just pocketing the $12k under the table each year, correct?

Is the $1380 the number I use to report/track the cost of the house?
This would be the amount I would use to offset the $1k/month rental income, but is this the correct figure from principal, interest and taxes, do I take all of these into account?

Also another issue is the 12k will push a portion of my income into the next tax bracket, but this is only about a $1k difference in taxes each year if it is treated like my normal salary income...

thanks for any help,
Kremerica

 

[TallBill]

Are you going to have a raffle to see who lives in it each month?

 

[JS80]

go with cash, you can only offset real estate loss with real estate income.

 

[Kremerica]

Originally posted by: JS80
go with cash, you can only offset real estate loss with real estate income.

That's what I was wondering?

So I can't use the operating losses to offset my personal income? even if the house is under my name and not a seperate entity(company, corp, or LLC. etc.)?

 

[Capt Caveman]

Of course Option 1 is illegal.

 

[JS80]

Originally posted by: Kremerica

Originally posted by: JS80
go with cash, you can only offset real estate loss with real estate income.

That's what I was wondering?

So I can't use the operating losses to offset my personal income? even if the house is under my name and not a seperate entity(company, corp, or LLC. etc.)?

that is correct. otherwise you'd have everyone buying a house, taking a loss (deprecation is the biggest factor), get a $50k job and pay no income tax.

 

[txrandom]

Why do you care about a portion of your income being pushed into a higher bracket?

 

[waggy]

good luck getting someone to pay cash. thats very risky for the renter. i guess if you have someone lined up and who is willing to pay cash and you don't mind breaking the law #1 looks good. just hope you get caught.

 

[imported_weadjust]

You have a net loss. So you should report it. You also get to include all expenses for upkeep and depreciation.

You would report the loss on your 1040 E Supplemental Income and Loss Form.

http://www.irs.gov/pub/irs-pdf/f1040se.pdf

 

[Jeraden]

Your scenario 2 isn't correct. You can't just write off the full cost of the mortgage, as part of that mortgage payment is going towards the principal of the house. So technically thats not a loss - thats part of you purchasing the property. It would just be your mortgage interest that you can deduct/offset from your rental income.

Although you can also depreciate the cost of the home probably, but you'd have to look into that...

 

[Dirigible]

Originally posted by: JS80

Originally posted by: Kremerica

Originally posted by: JS80
go with cash, you can only offset real estate loss with real estate income.

That's what I was wondering?

So I can't use the operating losses to offset my personal income? even if the house is under my name and not a seperate entity(company, corp, or LLC. etc.)?

that is correct. otherwise you'd have everyone buying a house, taking a loss (deprecation is the biggest factor), get a $50k job and pay no income tax.

You may be right, but when I rented I was under the impression I couldn't take a loss because of my income, but that it was possible in some situations. A quick google search implies that a passive loss (passive loss includes loss on rental property) is possible up to $25k. I may be misinterpreting because I skimmed, and the stuff I found may be out of date.

I'd be interested to see the hard data if this thread develops and people post links to IRS stuff.

 

[EagleKeeper]

Originally posted by: JS80

Originally posted by: Kremerica

Originally posted by: JS80
go with cash, you can only offset real estate loss with real estate income.

That's what I was wondering?

So I can't use the operating losses to offset my personal income? even if the house is under my name and not a separate entity(company, corp, or LLC. etc.)?

that is correct. otherwise you'd have everyone buying a house, taking a loss (deprecation is the biggest factor), get a $50k job and pay no income tax.

You can rent your house.
The costs of the house (mortgage, maintenance, insurance) all get reported on the Schedule E along with the rent.
Depreciation is also written off (5% each year of the value of the house when it is converted to business).

All of these expenses are able to offset the rental income with out any wage percentage limits.

And expenses that exceed the rental income can be rolled forward to the next year (indefinately) until you make them up with extra income or unload the property.

 

[Kremerica]

Originally posted by: Capt Caveman
Of course Option 1 is illegal.

Duh! I said that like twice in my post.

 

[Kremerica]

Originally posted by: JS80

Originally posted by: Kremerica

Originally posted by: JS80
go with cash, you can only offset real estate loss with real estate income.

That's what I was wondering?

So I can't use the operating losses to offset my personal income? even if the house is under my name and not a seperate entity(company, corp, or LLC. etc.)?

that is correct. otherwise you'd have everyone buying a house, taking a loss (deprecation is the biggest factor), get a $50k job and pay no income tax.

Thanks, that makes perfect sense.

 

[Kremerica]

Originally posted by: txrandom
Why do you care about a portion of your income being pushed into a higher bracket?

because taxes suck, big government is taking too much of my money already and spending it on useless crap from big pork barrel projects and legislative log rolling. On the other hand (And because I know I will get flamed for just typing the sentence prior), I fully understand why we have to pay taxes, and I have no problem paying taxes for infrastructure and civil support.

AND, because if I wasn't reporting the rental income earned, I would pay less taxes. It figures into my question on scenario 2, whether or not writing off the rental expenses would offset the loss in taxes from reporting the income.

 

[Kremerica]

Originally posted by: Dirigible

Originally posted by: JS80

Originally posted by: Kremerica

Originally posted by: JS80
go with cash, you can only offset real estate loss with real estate income.

That's what I was wondering?

So I can't use the operating losses to offset my personal income? even if the house is under my name and not a seperate entity(company, corp, or LLC. etc.)?

that is correct. otherwise you'd have everyone buying a house, taking a loss (deprecation is the biggest factor), get a $50k job and pay no income tax.

You may be right, but when I rented I was under the impression I couldn't take a loss because of my income, but that it was possible in some situations. A quick google search implies that a passive loss (passive loss includes loss on rental property) is possible up to $25k. I may be misinterpreting because I skimmed, and the stuff I found may be out of date.

I'd be interested to see the hard data if this thread develops and people post links to IRS stuff.

thanks for the comment,
I just did a quick search and came up with this:
Link to webpage about passive loss
looks like JS80 was correct, you cannot use the losses from rental property to offset your personal income tax. If you take a loss, you can just carry over the loss indefinitely until you sell the place for a profit, or you start making positive cash flow later.
very good to know...
this leads me to believe scenario 1 would make more money with great risk!

 

[Kremerica]

Originally posted by: Jeraden
Your scenario 2 isn't correct. You can't just write off the full cost of the mortgage, as part of that mortgage payment is going towards the principal of the house. So technically thats not a loss - thats part of you purchasing the property. It would just be your mortgage interest that you can deduct/offset from your rental income.

Although you can also depreciate the cost of the home probably, but you'd have to look into that...

thanks for reading and putting some thought into the post,
but my rebuttal is this:
the house is handled in my mind like a business, the mortgage is a product I am buying to resell or lease. even though I am paying towards my mortgage and building equity, which I can cash out later,(which I think was your point), its like I am paying more for my product than what I am selling it for, created negative cash flow and an operating loss for the year, or multiple years until the cost of the product or house lessens to a point below the income or rent.

I agree that you can write off mortgage interest, I did this in the past couple of years, but I'm not sure what figure to use to try to calculate the expenses of the product, like you were saying, do I just look at the cost of the interest payments, or include principal and interest and maybe even taxes...? I don't know...

 

[Kremerica]

Originally posted by: weadjust
You have a net loss. So you should report it. You also get to include all expenses for upkeep and depreciation.

You would report the loss on your 1040 E Supplemental Income and Loss Form.

http://www.irs.gov/pub/irs-pdf/f1040se.pdf

EXCELLENT RESPONSE, why can't there be more like this...

thanks I will read this link and see if I can post a comment in response.