Hello, I'm looking to buy a rental and I have some questions about the eitc and depreciation. I tried calling h&r block for answers but the guy who answered seemed very annoyed and was very short with me, thats why I'm here. Anyway here are my questions:
I know you can't make more than $3650 in investment income and still get the eitc. Is that $3650 gross or net investment income? In my case the rental would be my only investment.
The property I'm looking at purchasing is worth about $33000 but I'm going to (if they accept and my brother loans me the money) pay 28000. $6800 of the value is the land value. So would depreciation on the property be $33000 minus the land value or $28000 minus the land value. Is there an easy way to calculate what the depreciation would be each year?
Any help would be greatly appreciated.
$28000 minus the land value will be your depreciable basis.
Any DIY tax program will compute the depreciation automatically ... rentals are SL MM 27.5 year property ... educate yourself here :
Publication 946 … Depreciation
For the EIC ... it is NET income from the rental... so after expenses.
Rental income is not considered investment income. It's considered passive business income. That's why it gets reported on SCH E and not SCH C or anything else. The investment income is not seen or realized until the tax year you sell the property.
It is not common for rental property to show a profit "on paper" at tax filing time. In fact, it's more common to show a loss on rental property every single year you own it and rent it out. Especially if there's a mortgage on the property.
When you add up your deductible expenses of mortgage interest, property taxes and property insurance and include that with the depreciation you're required to take by law, those deductions alone will commonly be more than the rent you collect for the entire year. Add to that the other rental expenses you're allowed (such as repairs, maintenance, etc) and you're practically guaranteed to operate at a loss "on paper" every year when you file your taxes.
It's more common for you to operate at a loss every year "on paper" at tax time, with your losses being carried over to the next year. So your carry over losses will just grow and accumulate every year until the tax year you sell or otherwise dispose of the property.
All of your carry over losses are deducted in the tax year you sell/dispose of the property. So while not impossible, your chances of showing a taxable gain on your rental income on your tax return each year are not all that great.
If you are purchasing it at a discounted price ($28,000 rather than $33,000) you need to allocate a proportionate amount of that discount to the land too. You can't arbitrarily apply all of that discount to the building itself; the proportionate amount is applied to the land too.