too many people talk about the tax
benefits of rental real estate but never
explain how you actually do this on your
tax return well today I'm going to go
through how you actually claim income
and expenses on your tax return and how
it typically works for a standard single
family rental property that is Cash
flowing and how you can generate a tax
loss on your tax return where you have
taxable income you have a tax loss for
tax purposes now the property you have
and the numbers may be different but the
process and the strategy is exactly the
same I'm Matt swartson let's build
wealth all right I'm going to do a quick
example here of a property you bought
for $500,000 that you rent for $3,800 a
month now I'm going to show you how you
claim this on your tax return how
depreciation Works what income you have
to claim What expenses can you
legitimately take right on schedule e
and then how this benefits you for tax
purposes so let's break into this
example here and let's actually look at
Schedule E itself this is the form that
goes on top of your 1040 that shows what
happened on your rental property and
that claims the income and expense and
you'll see on Schedule E here there's a
place where you identify the property
you list the address and Identify the
property and each year as you have this
rental you're going to be hitting that
same property in the same area now you
also designate whether this is single
family or commercial the reason you're
identifying this rental property single
family versus commercial is that
determines how you get to take
depreciation for a single family rental
it depreciates faster which gives you a
higher expense that you get to take
versus a commercial property so if you
got single family rentals that's a good
thing you get a faster depreciation
expense we're going to come back to that
here in a second now the next area
you're going to see see there is the
income you're going to claim the rents
received now in this example we said
3,800 bucks a month which totals for the
year rent of $45,600 now the income is
somewhat straightforward the only thing
I would note there is you don't need to
list a security deposit if you've taken
a security deposit that's not rental
income but the monthly rent that is
being paid to you by your tenants that
of course is going to be listed there as
rent now the nice thing about the rest
of Schedule E is it gives you the
freaking checklist of what you need to
put down for expenses did you have ad
advertising expenses and renting the
property did you have Auto or travel and
visiting the property showing the
property looking at the property before
you bought it going to manage the
repairs or any maintenance that you have
on the property you track that mileage
and you take the expense there we're
going to come back to that here in a
second any commissions you might have
have for property management or any
leasing of the property your insurance
you have on the property any legal
expenses you had on the property any
management fees you had on the property
we're going to get into mortgage
interest and property taxes here in a
second which are going to be some of the
big line items and then of course
depreciation here later on now a lot of
people can easily understand okay the
advertising expense I listed it on XYZ
site to get rented okay I paid the
property manager but let's go to the two
big ones I want to make sure you do not
mess up now the first one is going to be
mortgage let's say that when you bought
this $500,000 rental that you got a
mortgage for $450,000 at a 7% interest
rate well when you're paying that your
monthly payment is
$2,625 of interest and $368 of principal
when you first out art on the loan now
remember in that payment only the
interest is deductible the principal is
paying down the balance of the loan the
IRS does not give you an expense for
that but the interest which is the cost
of the debt from the bank you do get to
take an expense on so we want to track
that interest now through year one under
this mortgage according to the
amortization schedule that is going to
be $
31,35 of mortgage interest you've got to
make sure you take that mortgage
interest deduction against your rental
income which again we had $45,600 of
rental income now mortgage interest
particular when you buy a property and
it's new and the bigger piece of your
mortgage payment is going to interest
that interest is going to be the biggest
expense you'll typically have on a
rental property now generally when
you're doing this a lot of your mortgage
providers are going to also track your
property taxes and any insurance you
might have on the property but if
they're not you got to make sure you're
tracking that as well because that's an
expense you're going to take as well all
right let's get to the second biggest
expense though and this is the
depreciation expense this one's a little
more confusing you don't get a statement
in the mail from your mortgage company
saying here's your depreciation expense
so let me show you how you're going to
calculate depreciation and where this
goes on Schedule E now remember this was
a $500,000 rental property and we get to
expense that over time now the iris
doesn't let you take the full value of
500,000 because you only depreciate the
building there's a certain percentage of
the property that's also land you don't
depreciate the land percentage now a
common method to take here is an 80 20%
ratio to say 80% of the purchase price
is building 20% is land so in this
example I would have $400,000 of
building that I get to take a
depreciation expense on what
depreciation is is the IRS saying hey
when you buy something like property or
equipment that building is going to go
down in value because things wear and
tear they break down they need to be
repaired and so that's an expense you
get to take over time now for
residential real estate you get to take
it over 272 years so for example you
will take 272 divided by $400,000 that's
going to give you the depreciation
expense you get to take each year now in
this example that amounts to $1
14,545 now keep in mind you're not
paying this
$1,545 this is not coming out of your
pocket but you get to take an expense on
your tax return this is the primary
reason that you can cash flow have money
in your pocket and not pay any tax on
your rental real estate is because of
the depreciation expense it is not an
out-of-pocket cost it's this Phantom
expense the IRS allows you to have in
rental real estate or on equipment in a
business that decreases the value of the
property in the eyes of the IRS and so
they're saying actually you get to take
an expense for that now your property
might actually be going up in value and
generally it's going to be going up in
value but you still get this
depreciation expense okay let's start
adding stuff up here to see where we're
at we had
31,35 of mortgage interest let's say the
property taxes were 2500 bucks and the
insurance on the property was ,200 so
that's getting me to $35,500 now I also
get to take dep appreciation expense
that's $1
14,545 but what else can I take what
else am I going to take that's going to
add up and give me more expenses now
let's hit some of these other expenses
that aren't as large individually but do
add up on your tax turns we want to make
sure we're including them the first I
would say is auto this is really
important for Real Estate because you're
typically driving to the property maybe
you self-manage this or you have a
property manager you meet contractor you
meet maybe you're going to see a tenant
or show it anytime you're traveling to
the property you need to be tracking
that mileage you get to take 67.5 cents
a mile let's say you spent 1,000 mil
traveling to the property over the first
year you acquired it and as you were
renting it and leasing it that is going
to give you a
$670 auto deduction because you get to
take 67 cents against 1,000 miles also
any maintenance expenses you may have
maybe it's cleaned in between a tenant
maybe you have landscaping or other
services to maintain the property that
you're paying for as the landlord that's
going to be an expense repairs of course
are going to be expensed also maybe
you're covering some of the utilities
maybe the tenant carries some and you
carry some make sure you're tracking
that and expensing that as well all
right now all these other expenses
although they could be 500 bucks here
1,000 bucks there 200 bucks there they
can add up as you see on Schedule E
there's a lot of options and where
you're going to claim those but let's
say in this example that adds up to
$5,000 in additional expenses I'm able
to take now we're at a total of
$54,600 of expenses now this is the big
reveal here and the big piece I want to
make sure everybody captures and
understands about rental real estate I
had $54,600 in expenses I had $45,600
$600 in rent I lost money but did I
really to the IRS I lost money in fact
in the irs's eyes I lost
$9,000 by having that rental property
but did you really you didn't you
actually made
$554 on that rental property that year
just from the cash flow maybe you
appreciated to the mortgage balance got
paid down there's a lot of benefits here
but let's just focus here on the cash
flow cuz I want to make sure you
understand you did not lose money to the
IRS you lost money the big reason why is
right here depreciation $4,000
$545 that is an expense you did not come
out of pocket for but you get the
benefit of on your tax return this is
one reason a lot of people talk about
rental real estate being a great tax
strategy I can cash flow have money in
my pocket and not have to pay the IRS
anything because of the depreciation
expense which is a phantom expense I'm
not coming out of pocket for but does
get to go on my tax return which allows
me to show lesser income so what do I
actually have now well I actually have a
tax loss of $9,000 and that tax loss
could be carried forward into future
years maybe I'm going to use it when I
sell the property maybe I can net it
against other rental properties where I
don't have a loss and also if you're a
real estate professional you could take
that loss to offset your other income
which is another additional benefit on
top of being able to cash flow the
property without having to pay any tax
now make sure you're tracking this
properly using Schedule E maybe you have
a great accountant maybe you have a Main
Street tax Pro that's helping you make
sure you're using someone that
understands you rental properties small
business so they're taking advantage of
all the tax deductions and strategies
that help you better build wealth now
please sub subscribe to my channel we've
got tons of videos here on how to save
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I'm Matt senson we'll see you next time