Basic Tax Questions

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I'm tring to get a good grasp on the specifics of the tax advantages that accompany real estate. Please help me sort this stuff out. I'm on the verge of buying some properties and want to know these numbers as well.

#1. Depreciation.
Is this figured by:
Tax shelter = (tax bracket) X (yearly depreciation)

#2. Expenses
Expenses simply reduce the income that is taxed, right (ie you're taxed on your NOI).

#3. Interest Expense
Are you taxed on your NOI Minus your interest payment (but not principal payment)?

#4. How would you figure Total tax shelter from a property (while holding it). It seems to me that it is:

(tax bracket X yearly depreciation) + (tax bracket X yearly interest payments).

Is this right???

Thanks for helping me get this straight.

Comments(2)

  • DaveT7th May, 2003

    For a residential rental use property:

    #1. Annual Depreciation expense = (depreciation cost basis) / 27.5 years

    The recovery period for the depreciable cost of a residential rental use property is 27.5 years. If the property is placed in service during the tax year, then the first year's depreciation expense is prorated.

    #2. Expenses.
    Expenses offset taxable rental income.
    NOI = rent collected - operating expenses
    Note, that depreciation and mortgage interest are not operating expenses for the NOI calculation.

    #3. Interest Expense.
    Your mortgage interest payment reduces your taxable rental income, but the principle component of your monthly mortgage payment is not deductible at all.

    #4. Total tax shelter from a property (while holding it).

    Taxable income = NOI - mortgage interest - depreciation expense

    Tax benefit or Tax liability = Taxable income x tax bracket.

    If your taxable income is positive, then you have a tax liability for that property. If the taxable income is negative, then you have a tax benefit (tax shelter) for that property.

    If you want a demonstration copy of my cash flow analysis spreadsheet in Excel 97 format, send a blank e-mail to me at jreynolds4@sc.rr.com and put "Cash Flow Analysis Spreadsheet" in the subject line. I will send you a completed spreadsheet for an example property that will hopefully clarify all these questions.

  • hibby767th May, 2003

    Thank you. That's exactly what I was looking for. I'm adding this feature to my own spread sheet. Thanks for your help. I sent you an email and look forward to checking out your spreadsheet.

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