I'm thinking about investing in a rental property; 4-5 family. How would we pay taxes on the rental income?
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ANSWERS: 1
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It gets filed on Schedule E and Form 4562 (depreciation). Keep great records! You count the rental income as income on Schedule E then go through each line putting in the expenses (property tax, insurance, mortgage interest, repairs, maintenance and the mileage or tolls back and forth from your house to the property). You also get to depreciate the building and the cost of appliances or major capital improvements over time. Each category has its own special life years so do not put them all in as the same. You may want some professional help because this is a little confusing first time. But you get to depreciate the wear and tear on these items. This could help you actually generate a loss of no more than $25,000 a year (depending on your other income). I know that sounds odd but it is usually the case. Of course when you sell this property you have to recapture all the depreciation and pay 25% tax on that and 15% (current cap gain rate) on the gain.
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