I understand that if you have a real estate investment, for many years of ownership, the distributions you will be receiving will be tax-free , since they are considered a return of capital and therefore not subject to taxes. Is it true that your rental income will not be taxed till you recover the investment fully? Thanks.
No. None of this is true. There's a schedule E tax form to fill out. You list the rental income and all allowed expenses including depreciation (I forgot over how many years, but it's about
3% of the cost of the property, given you don't depreciate the land). You net out these expenses against the income, and if the number is still positive, congratulations, you pay tax. If you are positive after including the depreciation, this is a good thing. If negative, then depending how high your income (I believe $150K/yr joint is the cutoff) you may be able to take the loss against regular income. If not, that loss carries forward to next year. The year you sell, if enough time has passed, you likely have a large gain, due in part to appreciation, and in part to the depreciation you took all those years. The depreciation recapture is taxed at a favorable rate. No offense, but if you do not understand the basics, you should read up on it until you do, and consider that real estate is unlike a stock investment. Cisco never called me to say the roof is leaking, or to unclog their toilet. (Actually, the best advice I give to potential landlords is this - rent the 1990 movie "Pacific Heights".) Joe"krasi" wrote
That's not true at all.
Gross income received in a rental activity is reduced by rental expenses, of which depreciation is one of, and the result is a taxable profit or a deductible loss. Depending on your involvement in the rental activity, losses might be suspended till you have profits from that property. But any profits are taxed at regular tax rates.
-- Paul A. Thomas, CPA Athens, Georgia
A trite saying, I know, but... If it sounds too good to be true, it probably isn't. IOW, not that I know of. Now a formal real estate investment trust might be treated differently, but not for individually held real estate. ChEAr$, Harlan Lunsford, EA n LA
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