The rent-income tax cut
How to figure the tax considerations for owning rental property: Take the cost of the house and divide that figure by 18. (Congress allows an 18-year depreciation period on real estate).
Then divide that figure by 12 to arrive at the monthly tax-deductible amount allowed for depreciation.
Add that figure to the amount of monthly interest from the mortgage payment plus the maintenance costs. That's the total monthly tax deduction allowed on the house.
Multiply that monthly tax deduction by your tax bracket and subtract it from the total monthly expense (mortgage plus maintenance).
The number you come up with is what you need to clear for monthly rent after you've allowed for the income tax owed on the rent. For example: Let's say the house in question costs $180,000, and the buyer borrows an 80 percent -- $144,000 -- mortgage at 12 percent interest.
$180,000 - 18 = $10,000. That's annual depreciation.
$10,000 - 12 = $833.33. That's the monthly, deductible amount for depreciation.
$833.33 + $1,300 (approximate average, monthly interest on $1481.76 mortgage payments) = $2,133.33. Add $200 a month for maintenance. That's $2,333.33 in monthly tax deductions.
Assume a 50 percent tax bracket. 2,333.33 x 0.50 = $1,166.67. Subtract that from $1,681.76, and after-tax expenses work out to $515.09. That's the figure the rent needs to cover.
Since the buyer is in the 50 percent tax bracket, he needs to charge $1,030.18 in rent (1,030.18 x 0.50 = $515.09). Okay? Well, almost. The federal government wants some of those tax deductions back when the house is sold. The IRS charges a capital gains tax on the amount that has been deducted for depreciation plus profit on the sale.