Posted by Seattle CPAs on November 11, 2013 · Leave a Comment
The guidelines associated with the personal and leasing utilization of premises are included in this article in the Landlord’s Tax Guide. This may be either because you are leasing out a space in the same property which you are living in, or you have got a vacation residence that you might privately employ a few weeks out of the calendar year and rent the remainder of the time. This information will not apply to you at all if you never use your rental property for personal use. However, if you do, you will want to keep reading.
Property rented for less than fifteen days. Any time you leased your property for less than fifteen days total in the past year, you don’t have to file any of your rental revenue. If this is the scenario, then the real estate property is going to be considered personal for taxation considerations, and on Schedule A of Form 1040, it is possible to deduct any of the property associated expenditures as personal.
Employing Your Holiday Home as a Part Time Rental
Personal use test. It’s important to work with some type of numeric formula to determine the total number of days during which the rental property was used for personal use. That is the personal use test. How you deduct your rental expenses is going to largely be determined by whether or not the personal use test is satisfied. Finding out the actual quantity of days in the past year in which the real estate property was leased out at fair market value is the initial step in calculating the personal use test. The next step is to multiply that number of days by ten percent. We will label the outcome the “total days rented” or “TDR” for short. The next stage will be to figure out how many days the rental property was employed for private use. We can label this “personal use days” or “PUD” abbreviated. Look at the table below for a vision of the personal use test.
NOTE: “Personal use” consists of use by you, any other owners of the home and property, plus the families of all individuals who own the property, unless of course your family member is paying out rent at fair market value.
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If TDR is…
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and PUD is…
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then the personal use test is…
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over 14
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less than TDR
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not satisfied
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under 14
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less than 14
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not satisfied
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over 14
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more than TDR
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satisfied
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under 14
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more than 14
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satisfied
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If test is satisfied. If the personal use test is satisfied, you will deduct your rental expenses only to the extent of the rental income. A net rental loss will not be attainable, but when there are any additional expenditures you do not write off this year, they can be moved forward to later years, provided that there is an adequate sum of rental earnings in the tax year in which you claim them.
If test is not satisfied. Your own leasing costs will never be restricted by the rental income if the personal use test is not satisfied. You could deduct your rental costs and also have a net rental loss. There could be a few passive activity rules, however, which may still restrict the rental loss tax deduction.
Computing all of your rental expenditures. A number of expenses should be allocated between leasing and personal application. These include expenditures that will have already been charged no matter the use, such as real estate taxes and mortgage interest. Find out the whole number of personal use days. Then, you will need to determine the total quantity of TDR. After that, divide rental days by the sum of PUD and rental days. The end result is the rental percentage. Finally, you have to multiply the total cost of your expenses by the leasing percentage that you have established, and then the result will be the rental deductible part.
Leasing a Section of Your House
You need to expressly allot all your costs in between private usage and leasing use if you rent out a part of your own personal home. The IRS allows a little versatility with the method you employ; just make sure it’s consistent from year to year. Some people choose the option of taking the number of rooms within their residence along with the number of rooms within the home, and divide them. Dividing the rented sq . ft . by the residence’s total sq . ft . is another option that lots of people go for. You’ll end up with rental costs and personal costs. Those allotted to the leasing income can be deducted as such, and you can use Schedule A of Form 1040 to deduct what’s left.
Huddleston CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. He is the owner of his own small business, Huddleston Tax CPAs. He is a graduate of Washington State University and the University of Washington School of Law.
Posted by Seattle CPAs on October 28, 2013 · Leave a Comment
Since you now are engaged in renting property for profit, it is crucial for you to make sure a number of fees and professional services are correctly set up and reported for tax uses. In this article, we will name some of these fundamental expenses.
Insurance
Insurance policy payments are pre-paid ahead of the given time period. An example here could be: you obtained insurance protection for this exact rental property on March 2012 for $1200. The protection time span is from April 2012 to March 31, 2013. Since the coverage time period does extend past the current tax year, you need to identify the insurance premiums pertinent to this present tax year only and bring forward the balance for the upcoming reporting year. With this example your allowed premium tax deduction may be $900 (9 months April to Dec 2012) or $100 per month of qualified rental property use.
Personal and business customers can frequently find a discount rate if the insurance carrier is able to bundle their insurance premium plans. You should ensure that you just allocate the fraction that is pertinent to your business rental property from this deduction. The individual and non-business related utilization might be deductible with your individual tax return. Lastly, Title insurance will not be suitable as an expenditure and should be included in the Cost Basis of the property.
Cleaning and Maintenance
The daily maintenance of the rental property is a deductible expenditure granted it is for common areas and everyday cleanliness. These kinds of costs are restricted to the days that are tax deductible leasing days and not personal use days. Many rental property owners have got long term contracts with local area services to take care of the property on a continuous schedule to be sure it’s in working and useable order. This may involve such professional services as window cleaning, dusting, cleaning home appliances and upkeep. Only these sorts of services are allowed, any type of major structural maintenance and changes will have to be allocated to the Cost Basis of the rental property.
Repairs
From time to time, there may be some need to repair a machine, do a bit of repainting, or some activity that doesn’t require a major reconstruction of the property framework. These expenses that are common and important are tax deductible depending on the rental period of time.
You have to note that these kinds of costs that are normally tax deductible in relation to the earnings of the property, you mustn’t include the periods of time which are regarded as personal times of use. Just those expenses in which are related to the authorized leasing time period are allowed.
On the IRS’s webpage, you’ll find a variety of reports you need. If you want more information, view IRS Publication 527.
Bothell CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.
Posted by Seattle CPAs on October 21, 2013 · Leave a Comment
The use of your own personal transportation as well as other forms of local transportation are deductible travel expenses when they are considered ordinary and necessary. If you travel to maintain and/or operate any rental residence or even obtain rental payments from occupants, you may be able to write off these kind of costs. Given that commuting is a private expense, it is not allowed for deduction. Likewise, you are unable to write off the expenses of commuting from your personal property to make improvements on a premises. A cost recovery process such as depreciation will ordinarily take care of this.
Actual Expenses
With this solution, you will document all expenses in association with the leased residence. IRS Publication 463, Chapter 5 identifies the way these expenditures have to be recorded and backed up with receipts. You need to have a physical report to support your deductions, but there are software program applications attainable via iPod, Quick Books, Mint, and others. You are required to report these deductions on either a Schedule C or Schedule E. For people with different rental properties, your business expenses should be allotted to the individual premises in which the expenses were incurred. Do not add in any personal travel costs to your deductions.
Mileage Method
Here you can write off the cost of your actual distance traveled. For example, if you drove 1200 miles throughout the year 2012, you would apply the present standard mileage rate of $0.55.5 per mile according to present tax rates.
Use of local transport including Zip Cars, metro bus, and vehicle rentals will need to have a direct connection to the real-estate and you must include documentation to support this. To demonstrate that your public transit use is solely business associated, it is encouraged that you maintain thorough records and tie all costs to a business account directly linked to your rental property business.
- You can obtain the different documents outlined in this information on the IRS’s webpage. Consult IRS Publication 527 for additional information.
Seattle CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.
Posted by Seattle CPAs on October 10, 2013 · Leave a Comment
This brief article is focused on the many IRS tax documents you will need as a property manager in order to completely account for, and report, your annual leasing income to the IRS. As is outlined in this article, the tax forms necessary are different, in accordance with the particular official business that manages the rental (individual, partnership, corporation, or LLC). Read the article entitled Best Rental Property Ownership, with this Guide, for more information about legal entity ownership.
NOTE: All the forms outlined below are available on the Internal Revenue Service’s website, at: http://www.irs.gov/Forms-&-Pubs. When you’re using tax preparing software, the program will have the different necessary forms.
Individual Ownership
For example joint rental property ownership with a partner, tenancy in common, or shared tenancy with rights of survivorship.
Form 1040. All independent tax payers will have to fill out Form 1040, and that is the place you should get started. Found on line 17 of the first page of Form 1040 is the net rental revenue or loss, subject to taxation. Note that as a law abiding landlord with rental property income and expenses, you won’t be allowed to take advantage of the simple Forms 1040A or 1040-EZ.
Schedule E. Schedule E is a certain addendum of Form 1040. Of this addendum’s various applications, just the application of reporting rental property income and expenditures is useful to your needs. The portion of Schedule E titled as “Part 1” will be the only section you must fill out. There are certain essential notes you should keep in mind, including: whenever reporting on a rental that you jointly own with a person, who is not your husband or wife, you will only need to report the costs you incurred along with the income you acquired. Keep in mind, furthermore, that you have to distribute expenses regarding rental and non-rental usage when you’re leasing a section of your house, or if you leased only for part of the entire year. To get more advice, find Tax Deductible Rental Property Expenses, the article set that’s found with this Guide.
Form 4562. On line 18 of Schedule E, you will deduct the depreciation for your rental, which you must employ Form 4562 to figure out. To get more tips, see the article called, Depreciation Expenses for Rental Property, that’s included in this Guide.
Partnership/Corporate Ownership
Such as a general or limited partnership, or S corporation.
Form 1065/1120-S. For people with a partnership, you must use Form 1065, the form a collaboration uses to report all of its organization operations. Form 1120-S is used by an S corporation to report company operations. Schedule K, line 2 of Form 1065 or 1120-S is the place where your own total rental property loss or profits are reported (Schedule K is embedded into the documents).
Form 8825. This tax form acts like Schedule E, but for partnerships and S corporations. It is essentially much like Schedule E. Be certain that all earnings and expenditures suffered by the corporation or partnership are included in their complete amounts (In the future, they are going to be allocated to each investor or business partner).
Schedule K-1. This tax document reports the net rental revenue or losses due to each business partner or shareholder as outlined by that business partner or shareholder’s property ownership interest. Every partner will get his / her own K-1 and will report the information of the K-1 on their Form 1040, Schedule E, Part II.
Limited Liability Co-ownership
You’ll be able to file just like you’re an individual property owner considering that, for taxation uses, a single-member LLC is a disregarded entity (look above). A multiple-member LLC has the option to be taxed as a partnership or as an S corporation (look above).
Redmond CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.
Posted by Seattle CPAs on May 22, 2013 · Leave a Comment
Many tax payers are leery of home office deductions, concerned that these deductions are more likely to spur an IRS audit. The IRS claims there is no legs to this. Regardless, follow the rules and you should have no concerns.
To claim this deduction you must be active (beyond depositing monthly checks). If you regularly spend a substantial amount of time maintaining and preparing properties, you will likely fit the term “active”.
If you meet the criteria for being an active rental property management the next requirement is that you must regularly use the office space only for running your business as a rental property manager.
In addition, you must meet at least one of the following criteria:
1. This office must be your principle space for the day-to-day running of your rental property business.
2. You must have no other location from where you run the administrative end of your management property rental business
3. This office space also serves as meeting location for your clients.
4. You use a separate structure on your property for conducting business.
After you have applied these threshold tests and determined that the work area in your home does in fact meet the requirements for the home office deduction, you will need to look into what kind of expenses can be written off. There are direct and indirect types. Direct expenses exclusively benefit the home office area of your home such as painting or cleaning. Indirect expenses benefit the entire home and must be apportioned out between the office area and the rest of your house. Mortgage interest, insurance, property taxes and utilities are common examples of indirect expenses. Square footage is the standard technique of calculating the proportion of the home office in relation to the entire house to come up with a percentage. A 2,000 square foot house with a 200 square foot home office area would mean 10% of the indirect expenses could be deducted as part of the home office deduction. You can also depreciate the house structure (not the value of the land) in the same percentage over 40 years. However, this may complicate matters if you sell the house.
And you will want to ensure that you are keeping fastidious records in case there is an irs audit. You will need to be able to prove that you were entitled to any deductions. A diagram and/or a photo will support your claim of square-footage ratios. It is wise to have your home office address listed on business cards, letter heads, or other forms of professional communication. And when using your home office to meet renters, it is wise to keep a record of meetings. You should keep property tax statements, insurance premium notices, mortgage interest statements, utility bills, and other related expense statements.
Home office deductions can get complicated. Please do not consider this to be reasonable solution to the informed counsel of seasoned Seattle CPA. But this should help you gain a basic understanding the requirements of successfully claiming home office deductions.
Seattle Accountant +John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.
Posted by Seattle CPAs on February 27, 2013 · Leave a Comment
There are several deductible expenses connected with owning a rental property. Here we will expand on expenses regarding professional fees, interest, and advertising expenses, that is expenses you might deduct from gross rental income to calculate net rental income.
Interest
If you’re renting a room in your home, or if it is a duplex and you’re occupying the other unit, you will need to pro rate the mortgage expense. (See the article titled Personal Use of Rental Property, included in this guide, for more on how to calculate personal use). Now if you are renting the property as its own living unit, you can deduct all of the mortgage interest you paid on Schedule E. Also, if you own only a part interest in the rental, you must multiply the total amount of mortgage interest paid on the property by your ownership interest. Be aware, however, that certain expenses you pay to obtain a mortgage (such as title/recording fees and commissions) are capitalized as part of your depreciable basis for the property, and are not expensed. See the article titled Depreciation Expenses for Rental Property, included in this Guide, for more on depreciation expense. Other types of interest may also be deductible, if you incurred the interest solely for the benefit of the rental property.
Advertising
Ads in the local newspaper or any paid online marketing for example are deductible expenses when promoting a rental property on the open market.
Professional Fees
You can deduct professional fees incurred in connection with the rental. For example, if you paid legal counsel to write a rental agreement, or even to initiate court proceedings to evict an errant tenant, you may deduct these fees. And additionally, you are able to deduct cost paid to an accountant/CPA for preparing the Schedule E of your return from the past year. Be sure to pro rate the total preparation fee between the Schedule E and the rest of your tax return based upon the percentage of time the sections of the return took. Any fees for preparing any part of the return other than Schedule E will go on Schedule A as individual tax preparation expense. Finally, when you pay any management fees or commissions to a professional realtor group for managing your rental, then you should deduct those expenditures also.
Seattle CPA +John Huddleston has written numerous articles on accounting and other tax related issues facing small business owners. He is a graduate of Washington State University and the University of Washington School of Law.
Posted by Seattle CPAs on January 15, 2013 · Leave a Comment
Several expenses incurred as you prepare a property for rental (in advance of actually renting) are tax deductible. So let’s take a look at a few of them.
NOTE: These startup expenses presented within this piece of writing are not the same sort of expenses that qualify as a deduction according to Internal Revenue Code section 195. Under section 195, specific startup expenses (in an active trade or business) are deductible up to $5,000 with a balance amortizable over fifteen years. However, in this section 195 of the Internal Revenue Code, rental activity is not included because rental activity is considered a passive activity not as an active trade or business. Find more information on active versus passive rules in the article entitled Tax Deductible Rental Losses.
Note: It isn’t just when you have actually rented a property that rental activity starts, but when you’ve made the property available for rent.
Expenses Relating to Obtaining a Mortgage
Expenses such as recording fees, mortgage commissions, and abstract fees, are capitalized and come to be part of your basis in the property. This means you have to depreciate such expenses, instead of expensing them all at once. See the Depreciation Expenses for Rental Property article, included in this Landlord Tax Guide, for more on depreciation.
Points
What are points? They are charges paid by a borrower to take out a mortgage or a loan. These charges may also be called loan origination fees, maximum loan charges, or premium charges. Points are deductible as interest, but require that you amortize the points over the life of the loan. Figuring out the quantity of points to amortize per year is a complicated process beyond the scope of this article. Consult a tax professional.
Improvements versus Repairs
You need to capitalize and depreciate improvements to the property in advance of putting it on the market. Improvements prolong the use of the property or materially increase the property’s market value. On the other hand, you may freely deduct all repair expenses. A repair maintains your property in good working condition without adding to its value or prolonging its use. Within the Landlord’s Tax Guide there is more on deductions and depreciation, you’d like to read further.
Certified public accountant +John Huddleston has written prolifically on accounting and other tax related matters facing small business owners. He is a graduate of Washington State University and the University of Washington School of Law.
Posted by Seattle CPAs on December 31, 2012 · Leave a Comment
This article will look at the various types of entities for rental property ownership. Below, you’ll see different entities have their disadvantages and advantages. In any case, the aim is to limit liability and guard your property from any unsecured creditors.
Also seek the counsel of an attorney or a certified public accountant well before establishing an entity and transferring ownership of a rental property. Do note, this is not a reasonable alternative for professional council.
TIP: Seek the counsel of a tax attorney or CPA before establishing an entity and transferring ownership of a rental property. This landlord tax guide is just not meant to be a comprehensive solution you should seek the care of a qualified professional.
Individual Ownership
This is the simpler and more widespread method of taking ownership. This is when you purchase a property in your own name. A big disadvantage of this type of ownership is that your creditors may be able to force a sale of the rental property if they receive court mandate, or they might compel you into involuntary bankruptcy. A big plus to this form of ownership is that the process is simple, without complicated forms or heavy filing fees.
Legal Entity Ownership
Legal entities include limited liability companies, corporations, general partnerships, and limited partnerships. Let’s look at the differences in a bit. Now let’s look at the major benefit of entity ownership, that being with entity ownership your personal creditors cannot force a sale of the rental property. The only entity type that does not require registration with the secretary of state is a general partnership. Regarding taxes, you’ll see the entity type doesn’t matter that much because in most cases rental income is taxed on your personal tax return, or “passes through”, See the article titled “Necessary Tax Forms for Reporting Rental Activity,” which is included in the rental property Tax Guide.
General partnership. This form of ownership takes place when two or more persons co-own a for profit business. With this general partnership the partners have equal management privileges, but also each partner is personally liable for the debts of the partnership. And for this reason a general partnership is usually not preferred.
Limited partnership. This entity is more complex than the general partnership because it requires at least one limited partner and a general partner. The general partner has sole management rights, coupled with personal liability for any debts. Whereas, the limited partner isn’t personally liable for debts of the partnership and likewise has no management rights. This entity selection is generally not recommended.
Limited liability partnerships (LLPs) or limited liability company (LLCs). A limited liability partnership and a limited liability company are similar forms of entity selection. Both provide limited liability to the members/partners. Meaning that you are not personally liable for the entity’s debts, that is, unless the catalyst was your own wrongdoing. This form of ownership is often preferable as it will reduce liability and presents with fewer formalities than those of the corporation.
Corporations. This form of ownership delivers limited liability and allows for perpetual existence. Although this form of ownership requires the maintenance of special formalities in order to maintain this limited liability guard. Thus for this reason that LLCs and LLPs are often times more apt to your purposes. Also worthy of mentioning is that corporations fall under one of two classifications: c-corp or s-corp. When a corporate entity is taxed as a c-corporation, then it pays tax on rental income, and then you’ll pay tax (again) when the c-corporation pays dividends. And it is preferred to avoid the double-taxation trap whenever possible.
Tax Accountant +John Huddleston has written prolifically on accounting and tax preparation. He is a graduate of the University of Washington School of Law.
