Tax Advantage of Rental Properties

It is tax time again. In this article I will point out the tax advantage of rental properties by attempting to explain Schedule E - Supplemental Income and Loss. Schedule E is the form where you will report "supplemental income and loss" related to rental real estate, royalties, estates, trusts, partnerships, and S-Corporations. Before I continue, neither Cleo or I are accountants so this paper is a generalization of how this works. Please consult a tax professional for how it actually works for your specific situation. Or, if you use this example as your guide to completing your taxes, plan on getting to know an IRS auditor very well. Also, the financial people will (factually) tell you that I am over simplifying and they are correct. In order to simplify this paper, I made the following assumptions:

  • I will assume each month has 30 days and that there are 360 days per year for some calculations.
  • The property is only used for rental purposes, no personal use.
  • Only one rental property, which is a single family home.
  • The property was purchased on June 17, 2016.
  • The purchase price was $200,000
  • Financing was 20% down, 4.5% interest, 30-year fixed.
  • You received $1,300/Mo. rent starting July 1st or 6 months.
  • The rehab cost was $0.
  • Annual taxes are $1,100/Yr. Prorated: $1,100 * 197 / 360 = $602
  • Depreciation - Assume 80% of the purchase price is depreciable improvements (building, etc.) over 27.5 years (The actual IRS useful life for a residential property). $200,000 * 80% / 27.5Yrs * 197Days / 360Days/Yr = $3184
  • Management fee is 8% of collected rent + 1/2 the first months rent = $1,300/2 + (6 * 1,300 * 8%) = $1274
  • Landlord insurance is $417/Yr or 197 / 360 * $417 = $228
  • Utilities include electricity and water during the 2 week rent up period.

Here is a link to the actual form

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