What is the tax difference between w2 income and passive income from real estate?
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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W-2 income is earned income, passive is not. As it is not earned income, it would not be subject to FICA and Medicare.
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.
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%).