Q & A With Americas Real Estate Professor: Rental Property

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By Leonard Baron

Rental Property & Income Taxes

Q. I am a first-time landlord and I know I need to do a rental property schedule for federal income taxes in April, but I really don’t understand too well, can you give me the basics? Rob N., Philadelphia, PA

A. Hi Rob, congratulations on joining the world of landlording! Hopefully it’s not accidental landlording! The IRS Form 1040 Schedule E is what you will need to fill out this year for your rental property. On that form, you will list the rental income at the top, and then all the expenses related to the property – interest, property taxes, HOA fees, maintenance, insurance, and all other expenses including depreciation. Then you will subtract all the expenses from the rental income and that will give you a net income or (loss) on the property operations. It will usually be a loss for the first bunch of years and you will use that loss to reduce the taxes you pay.

You take that income or loss on Schedule E and enter that amount on Line 17 of your normal IRS 1040 form and this will reduce your taxable income and hence the taxes you pay. These are typically Passive Activity Losses and there are limits on how much in losses you can take against your income, so make sure you read the rules on the IRS.gov website. And most importantly, work with a licensed tax professional to get your taxes done correctly the first time around.

Investing in Apartment Building Joint Venture

Q. I am not a real estate investor, but an acquaintance I met wants me to invest in an apartment building he is buying with about 10 other investors. I’m interested, but very cautious. Any guidance? Michael Y., San Diego

A. Hi Michael, it’s good that you are cautious because many investors lose their money on real estate when they throw caution to the wind and blindly invest. First off you need to get the current financial statements for the building and a projection from your acquaintance showing how he intends for you to make a fair rate of return on your invested cash equity. If he can’t provide that because they don’t know how to calculate it, or his projections are wholly unreasonable, avoid investing with him. And if the property has negative cash flows, as many do, particularly prize properties, avoid, avoid, and avoid! Get some additional guidance from an experienced investor and a good C.P.A. with real estate experience as they should be able to assist and help you with other due diligence you need to do.

Lastly, I would suggest as final checks, and before you pull out your checkbook to write the check, that you check his credit report, check his criminal history, check his past real estate deals and independently verify his past results, and do a legal search just to see if anything negative comes to light. If he won’t assist you in independently obtaining this information, you’d better be comfortable as to why. If everything looks good, it might make sense, but you must understand that even the best looking deals can go bad, so don’t put all your eggs into one piece of dirt!

Leonard Baron is America’s Real Estate Professor® - his unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches real estate owners how to make smart and safe purchase decisions. He is a San Diego State University Lecturer, blogs at Zillow.com, and loves kicking the tires of a good piece of dirt!


Email Your Questions to: Leonard@ProfessorBaron.com



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