Is it possible to create a “paper loss” on my taxes for my rental income (short term rentals, mid term rentals, and long term rentals), and not have it affect my ability to buy a house in the near future due to my income “looking” low.
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Hi Jacob,
To add to what Anthony has said. You may be able to make repairs to offset rental income and create a loss. It will depend on the property size, the repairs needed, and how much revenue it generates. However, if you know some extensive repairs, such as the appliances and the carpet, you could combine the repairs in the same year to have a larger deduction in addition to taking depreciation on the property. Remember, you can’t do repairs to get a property ready to rent and take a deduction.
Whether or not it will affect your ability to purchase a future house is dependable. Your income will appear to be lower on your tax return because of the loss. You can present the underwriter with a few years of rental income to show what the income is usually, with one year being the year of the abnormal loss. That said, it may be best to speak with an underwriter and a tax professional.
Hi Jacob! Great question.
There are a log of nuances to your question, but here is some helpful info.
You should not buy a property, solely for tax purposes. That being said, if you are an active real estate professional in the IRS’s eyes or have a short-term rental, you may be able to use that to offset active income – the rules are tricky so you’ll want to work with a qualified tax professional here.
When you go to buy a property for yourself in the future, the other property may impact your ability to buy the next one, but if the property is income producing the impact may be positive. However, the “paper losses” from the rental property are likely from depreciation which is best described as a phantom loss and not a real loss (aka it’s not a real expenses, it’s a part of the tax code).
Again, it’s very nuanced. At the end of the day, if you are a business owner lenders require more scrutiny of your records for future lending opportunities (I say business owner, because it sounds like real estate might be your primary role). And during that process, they will request tax returns and make their own evaluation.
Long-story short, it depends. But it could help or hurt, depending on the actual property and the composition of your overall income, assets, and liabilities.
Hope that helps!
Anthony