I’m about to buy a 2-family where I’ll be living in one unit while renting the 2nd floor out. I’m aware of the IRS rule that states passive losses cannot be deducted if your AGI is over 150k. I’m also aware of filing as a ‘real estate professional’ but there’s no way I can gain that status
However, passive losses can be accumulated over years and offset when you sell the property. Does anybody know if can you offset them against non-passive income like my regular job’s salary? So for eg: if my accumulated passive losses over 10 years of holding the property total to 100k and my salary in the selling year is 100k, would I pay no taxes that year?
In the year you sell the property the suspended passive losses will be released on the 8582 and will go to line 23 of Sch E, and from there to line 17 of the 1040.
So, yes. If you in fact had suspended losses of $10k per year for 10 years, this would offset a $100k salary.
However, if you’re losing $10k per year, you are probably in a negative cashflow situation and might want to rethink your strategy. This might be ok if you are planning for the property to increase substantially in value over the term. But losing $100k in cash to save $30k in taxes is not smart.
mcwagner - I think you may be right. I’ve been struggling with numbers last few days and understanding how multi-family taxation works (new to this and a 1st time homebuyer). Can you help me crunch some numbers?
I’m not buying a 2 family to become a real estate investor but simply to help out paying some of my mortgage
Assume these numbers for the whole bldg (I’ll stay on 1st floor and rent 2nd floor and both units are equal square footage)
purchase price as of 1/1/2012 - $600,000 (I’ve deducted the land value from this number)
Sale price as of 12/31/2021 - $900,000 (I’ve deducted the land value from this number)
Annual rent - $17,000
Annual costs (utilities, property tax, mortgage interest etc) - $27,000
Depreciation - ???
Can you help me with the calculations and how things will look like in 2022 when I sell the property with these numbers? I will be accumulating losses every year since AGI > 150k
I can tell you how YOUR numbers will look when you sell. This will only be as accurate as your estimates and assumptions. If you want real-world projections, you need to start with real-world assumptions. I always get suspicious when I see a bunch of nice, round, lots of zeroes numbers.
ie: Taxes aren’t $6,000. They are exactly $6,318 this year and have historically increased by an average of 2% per year for the last 5 years, and so a 2% increase per year for the next 10 years is a reliable estimate. Repeat for every expense line item.
- Land is important. don’t ignore it.
1a. How did you arrive at your land number?
- I would assume that in a 2-family building the utilities are split. This makes utils in the rental meaningless for your calculation (except for vacancy costs). If some utils are split, but not all, then you need to split your calculations.
2a. Don’t forget vacancy costs.
- Your 10-year 133% appreciation in value looks… “optimistic.”
3a. Maybe try a best/worst case analysis
This is not a “back of a napkin” analysis situation. You need a detailed detailed detailed financial and CASHFLOW projection. It’s real money you’re putting on the line.
Of course, it’s your money, not mine. Be as detailed as you like. Your resulting accuracy will deviate accordingly…
Honestly, all my numbers have been rounded up from the closest real world numbers except the appreciation. Point is I’ve not even made an offer on this house so it’s a presumptive situation at best at this point. I was told by the broker of the approximate land value but she is going to get me an exact number soon. I have calculated 17,000 as 10 months rent, not 12 months. I don’t mind you changing appreciation of the house over 10 years to a lesser value.
Point is - I’m looking to get an example of how to deduct these costs and then take that and put formulas in a spreadsheet (would be glad to share when I’m done with it). Before I make an offer, I’ll take all actual numbers and re-run all this.
Basically everything you spend on the rental is deductible.
Depreciation is the building (minus land) purchase price divided by 27.5 years. Use half this for the first year. [the actual calculation on your return may be different, but this will be close enough for your estimate].
Don’t forget regular repair expenses, new roof as needed, etc. cashflow is more important to you than income or tax.
Let’s clarify what Mark is telling you about depreciation.
You can’t depreciate land, only the cost of the dwelling structure. Since this is a duplex and you will be living in half and using the other half for a rental, only half of the dwelling structure can be depreciated.
Take the cost of the building, divide by 2, then divide again by 27.5. The result will be your annual depreciation expense starting in year two. For the first year, you prorate the annual depreciation to the month you put the property in service. Buy in June, you essentially have only 6 months of depreciation in the first calendar year of ownership.
The other half of the property is your primary residence. You can deduct half of the property taxes and mortgage interest attributed to your residence on Schedule A, but only if you itemize. You can’t deduct cost of repair, maintenance, upkeep for your residence. These are personal expenses and not deductible.
The other half of the property taxes and mortgage interest is attributed to the rental unit and can be deducted on Schedule E along with all costs of repairs, maintenance, and upkeep you spend directly on the rental unit. If you manage yourself, and do your own repairs on the rental, you labor is contributed free of charge. You can not take a deduction for your own labor. Paint the unit, for example, you can deduct the cost of paint and supplies but not your own labor.