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Author Topic: What is the tax difference between w2 income and passive income from real estate  (Read 572 times)
Tim_N
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« on: December 03, 2008, 07:40:49 AM »

From my understanding if I make 100k as a single person, I pay 28% federal tax, plus state, plus medicare etc with a W2. What about if I make 100k in passive income from several real estate properties. How much taxes will I pay? What is the difference?
Thank you! Basically, what is the percentage difference between the two?
Thank you for your answers.
WHAT IS THE DIFFERENCE IN % BETWEEN TWO INCOMES AT $100,000 per year?


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Brent
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« Reply #1 on: December 07, 2008, 01:41:32 AM »

It would depend on if the 100K you made as a single income was paid by your employer or you in the form of 1099 income. 
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botygy
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« Reply #2 on: December 07, 2008, 08:08:52 AM »

W-2 income is earned income, passive is not.  As it is not earned income, it would not be subject to FICA and Medicare.


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wartz
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« Reply #3 on: December 07, 2008, 08:59:19 AM »

Income reported on a W-2 is earned income because it is received in exchange for your service. Similarly, profits from operating a business are earned income.  Passive, or unearned income, is income generated from capital like rents or interest.


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v_b
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« Reply #4 on: December 07, 2008, 05:01:29 PM »

Year to year rental income is taxed at the same tax rates as wages.  So if you are in the 28% tax bracket, the tax is 28% whether it's from wages *or* real estate.

However, real estate doesn't kick off huge amounts of income.  One of your legitimate expenses is depreciation.  If you don't have tenants for a few months, you often wind up with negative income during the early years (which is limited to $25,000 of loss against other income and the rest is carried forward) and a huge spike in income the year you sell the property.  When you sell, the depreciation is paid back at ordinary income tax rates (28%) and the capital gains at the long term rate (15%).


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