Posted by Seattle CPAs on November 5, 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.
Seattle CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. Since 2002, he has been 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 24, 2013 · Leave a Comment
You should determine that all professional services and fees are arranged adequately and accurately recorded for the objectives of tax compliance, if you have chosen to rent out property for profit. Here we will name these significant expenses.
Insurance
Insurance coverage payments are pre-paid prior to the designated time frame. An example here would be: you purchased insurance coverage for this specific property on March 2012 for $1200. The policy time period is from April 2012 to March 31, 2013. Since the insurance coverage period does extend past the present tax year, you must apportion and allocate the premiums pertinent to the present year only and then bring forward the balance for the following filing year. This means that $900 (9 months April to Dec 2012) or $100 per month of qualified rental property utilization will be your allowable insurance premium.
Note that some Insurance carriers routinely combine insurance premium plans among personal and business clients at a mark down rate. You should ensure that you only allot the fraction which is relevant for your company rental property from this tax deduction. The personal and non-business related utilization might be deductible with your personal tax return. You can include Title Insurance in the Cost Basis of the rental property, as it’s not an applicable expenditure.
Cleaning and Maintenance
If it’s used on day to day cleaning and maintenance of common places, then day to day maintenance of the property will be an allowed expense. However, the expenses are only tax deductible if they’re not on personal use days, but are on allowed rental hours. A lot of rental property owners have got deals with local area professional services to take care of the property on a continuous schedule to ensure it is in running and useable order. This can include things like such services as cleaning windows, dusting, cleaning home appliances and general maintenance. Structural maintenance and modifications will not be allowed, so must be covered in the property’s Cost Basis.
Repairs
There are frequently projects that don’t need serious renovation of the framework of the property like painting or equipment maintenance. These kinds of expenses that are typical and necessary are tax deductible in accordance with the rental time period.
You should realize that these costs which are usually allowable against the earnings of the property, you shouldn’t incorporate the periods of time that are deemed private times of use. The only costs that are deductible are the ones which are associated with the approved leasing timeframe directly.
You can get the different reports defined in this information on the IRS’s website. Consult IRS Publication 527 for additional information.
Huddleston 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 16, 2013 · Leave a Comment
The specific usage of your own automobiles as well as other cars may be allowed as an expense depending on a number of factors when common and vital. Should you use your own motor vehicles to help maintain and operate a leasing property or to secure money from occupants, you may write off such costs. Since commuting to work is seen as a private expense, it’s not allowed for tax deduction. Likewise, you won’t write off the costs of traveling from your private home to make improvements to premises. A cost recovery system like depreciation will usually deal with this.
Actual Expenses
You will document all the costs pertaining to your travel from home in connection with the leasing property. Those expenditures must be documented and backed up with receipts relative to IRS Publication 463 Chapter 5. Certain software program apps can be purchased via iPod, Quick Books, Mint, and more; you will have to continue to keep a concrete report to support any deductions. You have got to report this either with your Schedule C or Schedule E along with important documents connected. Any expenditures must be allotted to each property where the expenses were incurred if you’ve got a number of rental properties. Only use that’s connected with your rental properties is tax deductible, so remember never to add any kind of personal or other sorts of non-property related expenses on the tax forms.
Mileage Method
Here you write off your actual distance driven to your rental property. For instance, if you drove twelve hundred miles throughout the year of 2012, you would implement the present standard mileage rate of $0.55.5 per mile, and write off the cost.
Working with community transport like Zip Cars, metro bus services, and vehicle rentals will need to have an immediate correlation to the real estate property, and you must have records to support it. In order to show that this public transport use is exclusively business related, it is suggested that you obtain different fare cards and individual company accounts for all Zip Cars and rental cars used.
Quick Note: You can obtain the different documents suggested in this information on the IRS’s webpage. Check with IRS Publication 527 for more 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 8, 2013 · Leave a Comment
Being a property manager, to properly record and report your annual rental property earnings to the Revenue Service, you’ll require many Revenue Service tax forms which are specified inside this article. Depending on the particular authorized business who manages the rental home, the tax documents needed vary, as detailed in the next paragraphs (individual, partnership, corporation, or LLC). See the page titled Best Rental Property Ownership, provided within this Guide, for more on legal entity rental property ownership.
NOTE: The different documents mentioned here can be located on the Revenue Service’s webpage, at: http://www.irs.gov/Forms-&-Pubs. If you use tax preparing software, the program will have each of the needed forms.
Individual Ownership
Such as joint rental property ownership with a husband or wife, tenancy in common, or mutual tenancy with legal rights of survivorship.
Form 1040. All independent citizens will have to use Form 1040, and this is where you should begin. Your own total rental profits or losses subjected to tax are on line 17 on the first page of Form 1040. Keep in mind that as a good landlord with leasing income and expenses, you are not allowed to utilize the simplified Forms 1040A or 1040-EZ.
Schedule E. Schedule E is one addendum to Form 1040. It has a variety of usages, yet the application that is meant for yourself is reporting of leasing earnings and costs. The one element of Schedule E that you have to finish is the section labeled as “Part I”. Several important notes to bear in mind: if you happen to own the rental jointly with someone other than your wife or husband, report just the earnings which you gained along with the expenditures that you sustained. Bear in mind, additionally, that you have to allocate expenditures regarding rental and non-rental use should you be renting a part of your house, or whenever you rented only for a part of the calendar year. For more details, see Tax Deductible Rental Property Expenses, the article series which is provided within this Guide.
Form 4562. Form 4562 is employed to calculate depreciation of your property, that you can deduct at line 18 of Schedule E. See the article titled Depreciation Expenses for Rental Property, found inside this Guide, to get more advice.
Partnership/Corporate Ownership
For example a general or limited partnership, or S corporation.
Form 1065/1120-S. The form a partnership employs to report each of its business activities is Form 1065, that you will need to fill out if you’ve got a partnership. Form 1120-S is used by an S corporation to report business operations. Schedule K, line 2 of Form 1065 or 1120-S the place your own total rental loss or profits will be reported (These forms are integrated with Schedule K).
Form 8825. This form acts just like Schedule E, except that it’s for partnerships and S corporations. Schedule E and Form 8852 are basically similar. Be sure to include complete amounts of any profits and operating costs sustained by the partnership or corporation (Later, these are divided among each shareholder or partner).
Schedule K-1. The total rental property profit or financial loss owing to each shareholder or business partner is reported by this tax form, according to the property ownership interest of the investor or business partner. The details of the K-1 sent to every partner needs to be reported on his / her Form 1040, Schedule E, Part II.
Limited Liability Co-ownership
A one member limited liability company is really a disregarded entity for taxation requirements, which means you could file as if you’re an individual owner (look above). A multiple-member LLC may choose to be taxed as either a partnership or as an S corporation (see above).
Huddleston 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 10, 2013 · Leave a Comment
Many business owners are leery of home office deductions, concerned that these tax deductions are more likely to encourage 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 consistently spend a substantial amount of time maintaining and preparing properties, you will likely fit the definition of the term “active”.
If you’ve met this qualifier you’ll also need to meet the basic home office deduction thresholds. First, you have to use the home office exclusively for your rental business on a regular basis.
Then you’ll also have to meet at least one of the following:
1. This office space must be the principle location from where you manage and run your business as a rental property manager.
2. You must have no other location from where you run the administrative end of your property managment rental business.
3. You meet tenants in this home office space.
4. You use a separate structure on your property for business.
After you’ve determined that you are eligible for home office deduction, then it’s time to look at what expenses qualify for write offs. There are two major types: indirect and direct. Indirect expenses benefit the entire home. And direct expenses benefit only the home office space. Examples of direct expenses could be painting or cleaning expenses. While examples of indirect expenses can be payments on property tax, mortgage,, and utilities, these expenses are apportioned out between the office and the rest of your residence. This percentage is normally calculated by the square-footage ratio. For example, a 2,000 square foot home with a 200 square foot office space would mean that 10% of indirect expenses (mortgage payments, utilities, et cetera) would count toward home office deduction expenses.
As you don’t want any trouble if you do get audited, you want to keep good records to prove that you were actually entitled to take the deduction and that it has been accurately reported. You should document the home office space with a diagram and/or photograph that supports your calculations. It is sensible to use your home office address on any business cards and other forms of communication and to have business mail delivered to the home office address. You should maintain a log of client meetings and other time spent working there. Records you should keep to substantiate expenses include: utility bills, property tax statements, insurance premium notices, 1098 mortgage interest statements and receipts for any other home office expenses.
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 19, 2013 · Leave a Comment
There are several deductible expenses connected to owning a rental property. In this article we will focus on expenses regarding professional fees, interest, and advertising expenses, that is expenses you may deduct from gross rental income to calculate your net rental income.
Interest
The primary type of interest you will most likely be deducting is interest on the mortgage. If you are renting the property as its own living unit, you can deduct all of the mortgage interest you paid on Schedule E. Meanwhile, whenever you are renting a room in your home, or if it is a duplex and you are occupying the other unit, you will have to pro rate the mortgage expense. For more on personal use, see the article entitled Personal Use of Rental Property, which is included in the Rental Property Tax Guide. Personal use mortgage interest always goes on Schedule A of your Form 1040 (not on Schedule E). Also, if you own only a part interest in the rental, you have to 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. For example, if you took out a personal loan in order to replace carpeting, or fix the roof.
Advertising
Promoting a rental property on the open market, through marketing efforts such as posting newspaper ads or paying for internet marketing, is a tax deductible expense.
Professional fees
If you pay an attorney at law to set up a rental agreement or initiate court actions so that you can evict a renter, you may deduct these expenditures. Additionally you can deduct fees paid to an accountant or Seattle CPA for preparing the Schedule E of your tax return from the previous year. Be sure you pro rate the complete fee between the rest of your return versus the Schedule E portion of you return based on time spent. Any fees unrelated to the Schedule E appear on Schedule A as personal tax preparation expenses. Also any management fees or commissions to professional realtor groups for overseeing your rental property are deductible as well.
Seattle Accountant +John Huddleston has written prolifically on accounting and other tax related topics 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 January 8, 2013 · Leave a Comment
This individual article of the the Tax Guide for Landlords (“Guide”) looks at deductible startup expenses for rental properties. You might be able to deduct certain expenses incurred while preparing the rental property, that is before actually renting it.
NOTE: The expenses discussed within this write-up will not be the same sort of expenses allowed as a deduction according to Internal Revenue Code section 195. Under this section 195, certain expenses incurred as startup expenditures in an active business or active trade are deductible up to $5,000, with a balance amortizable over a fifteen-year period. Though, under section 195 code, rental activity isn’t included since rental property is regarded a passive activity instead of an active trade or business. See the article titled Tax Deductible Rental Losses, included in this Guide, for more on passive activity rules.
NOTE: “Rental activity” begins as soon as you place a property on the market and make it available for rent, not when you have actually rented it.
Obtaining a Mortgage Expenses
Expenses such as recording fees, mortgage commissions, and abstract fees, are capitalized and turned out to be part of your basis in the property. And this means that you have to depreciate these particular expenses, rather than expensing them all at once. Read the Depreciation Expenses for Rental Property article, included in this Guide, for further study of depreciation.
Points
“Points” are charges paid by a borrower to take out a loan or a mortgage. 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 how many points to amortize per year is a complicated process beyond the scope of this article. Talk to a tax professional.
Improvements vs. Repairs
You must capitalize and depreciate all improvements you make to the property before putting the property on the market. Improvements prolong the use of the property or materially increase the market value of the property. Repair expenses, on the other hand, you may freely deduct. 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.
Seattle Accountant +John Huddleston has written extensively on accounting and other tax related subjects. He is a graduate of Washington State University and the University of Washington.
Posted by Seattle CPAs on December 21, 2012 · Leave a Comment
This article discusses the types of entities for the ownership of rental properties. Below, you’ll see different types of entities have their advantages and disadvantages. However, the general aim is to limit liability and guard your property from any unsecured creditors.
Also seek the counsel of a CPA or an attorney prior to establishing an entity and transferring ownership of a rental property. Do note, this guide is not a comprehensive replacement for qualified council.
TIP: Seek the counsel of a certified public accountant or tax attorney before establishing an entity and transferring ownership of your rental property to it. This landlord tax guide is just not meant to be an all-in-one solution you should seek the attention of a qualified professional.
Individual Ownership
This form of ownership is the more common and simplest form of ownership and occurs when you purchase the rental property in your own name. This includes owning the property with your spouse, or as joint tenants or tenants in common with someone else. The main benefit is that this is straightforward, for one it does not require you to file any complicated paperwork or pay any heavy filing fees. The main disadvantage to this form of ownership is that your creditors could force a sale of the rental property if they can attain a court order against you, or compel you into involuntary bankruptcy.
Legal Entity Ownership
Corporations, general partnerships, and limited liability companies are all examples of legal companies. The differences between the entities are important and outlined below. The major advantage to entity ownership is that your personal creditors can’t force a sale of the rental property, since you do not own it. The only type of entity that does not require registration with the Secretary of State is the general partnership. With regards to taxes, the type of entity chosen does not matter a tremendous amount because in most cases, rental income “passes through” from the entity and is taxed on your personal tax return (but see the cautionary note under corporations). Read the article titled Necessary Tax Forms for Reporting Rental Activity, included in this tax guide for landlords, for further discussion on just how rental income is taxed.
General partnership. The partnership is an association of two or more people who carry on as co-owners of a for-profit business. Generally partnership, each partner has equal management rights, but is personally liable for the debts of this partnership. And regarding that liability, a general partnership is in most cases not recommended.
Limited partnership. A limited partnership is more complex considering the fact that this method of ownership requires at least one general partner and one limited partner. The limited partner will not be personally liable for any debts of the partnership, but then again has no management rights. Now the general partner has sole management rights, and also personal liability for any debts that may result from the partnership. This arrangement is also generally not recommended.
Limited liability partnership or limited liability company. A limited liability partnership and a limited liability company are similar forms of entity selection. Both of them provide limited liability to the partners and members. Meaning that you are not personally liable for the debts of the entity, that is, unless the catalyst was your own wrongdoing. This form of ownership is often preferable because it will reduce liability and presents with fewer formalities than those of the corporation.
Corporations. This mode of ownership gives you limited liability and allows for perpetual existence. Although they also require the maintenance of specified formalities for you to maintain this limited liability guard. So for this reason that LLCs or LLPs are often times more suiting to your aims. Also worth mentioning is that corporations are categorized as either s-corp or c-corp. When a corporation is taxed as a c-corp, it pays tax on rental income, and then you will pay tax (again) when the c-corp pays dividends. And it is more desirable to side-step the double-taxation trap whenever it is possible.
Seattle Tax CPA +John Huddleston is a graduate of both the UW and WSU. He has written many tax related articles over the years, and has spoken about tax issues on the radio.
