Posted by West Seattle CPA 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.
|
If TDR is…
|
and PUD is…
|
then the personal use test is…
|
|
over 14
|
less than TDR
|
not satisfied
|
|
under 14
|
less than 14
|
not satisfied
|
|
over 14
|
more than TDR
|
satisfied
|
|
under 14
|
more than 14
|
satisfied
|
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.
West Seattle 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 West Seattle CPA on October 28, 2013 · Leave a Comment
You should determine that all of the services and expenses are arranged properly and thoroughly documented for the purposes of taxation compliance, now that you have chosen to rent out your property for income. Let’s look at some of these costs.
Insurance
As with the majority of insurance premiums, it’s usually prepaid beforehand for a particular amount of time. Scenario: You bought an insurance policy on the property in March 2012 for $1200. The coverage time period is from April 2012 to March 31, 2013. Since the policy period does surpass the present tax year, you need to apportion and identify the insurance premiums pertinent to this current tax year only and carry forward the balance for the next filing year. In this particular example your permitted premium deduction may be $900 (9 months April to Dec 2012) or $100 per month of qualified rental utilization.
Business and personal clients can often receive a mark down rate if their insurance company is willing to combine their premium packages. You must ensure that you just allocate the fraction which is relevant to your company rental property from this deduction. The personal and non-business related utilization may be tax deductible on your personal income tax return. Finally, Title insurance is not suitable as an expense and should be part of the Cost Basis of the property.
Cleaning and Maintenance
If applied to ongoing cleanliness and upkeep of commonly used spaces, then day-to-day upkeep of the property can be an authorized expense. Still, the costs are only allowable if they are not on personal use days, but they are on allowable rental days. To ensure the property is in good shape and functioning order, you can try what many other rental property owners do, and hire a local area hired service to maintain your rental property. These types of services will offer a range of professional services which include standard upkeep, dusting, washing windows, and appliance cleaning. Just these types of services are allowed, any sort of major structural maintenance and modifications have to be invested in the Cost Basis of the rental property.
Repairs
There are frequently jobs which do not require serious reconstruction of the framework of the property such as repainting or appliance maintenance. Depending on the leasing duration, you are able to write off these kinds of necessary and ordinary expenditures.
It is important to observe that these expenses which are normally deductible against the income of the property, you must not incorporate those times that are deemed private times of use. Just those expenditures in which are related to the approved rental period are permitted.
You can get all the forms defined in this information on the IRS’s webpage. If you need additional information, look at IRS Publication 527.
Renton 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 West Seattle CPA on October 17, 2013 · Leave a Comment
The specialized usage of your personal automobiles or other forms of transportation may be deducted as an expense based on certain factors such as if they’re ordinary and needed. If you work with your own personal car to receive rental payments, perform maintenance duties and/or managerial tasks these are deductible travel costs. Commuting is considered a personal cost and is not deductible. Any travel costs tied to making improvements on a rental property may not be deducted. A cost recovery system such as depreciation will usually take care of this.
Actual Expenses
The various expenditures which are pertaining to having to travel from home associated with the rental residences are recorded in this approach. IRS Publication 463, Chapter 5 specifies how all of these costs will have to be documented and backed up with invoices or receipts. You need to have a concrete record to backup your write offs, although you will find software program apps offered with iPod, Quick Books, Mint, among others.. You must report this in your Schedule C or Schedule E along with corroborating forms included. When you’ve got more than one rental properties, your costs will be allotted to the individual residences that costs were incurred. Only use of vehicles that’s involving the property is deductible, so know never to include any non-business or other sorts of costs that aren’t associated with your rental properties in the tax forms.
Mileage Method
Here you may write off your actual miles driven. You’d employ the current standard mileage tax rate of $0.55.5 per every mile drive that tax year.
You will need records to support any kind of utilization of area travel such as car rental, Metro bus services, and Zip Cars along as the use of which is directly associated with travel to your rental premises. It is a good idea to save your ticket stubs for local travel. It is also a good idea to charge Zip Car and car rental services on a business account tied directly to your rental property.
Quick Note: You can obtain the different documents outlined in this information on the IRS’s webpage.For more information be sure to consult IRS Publication 527.
Burien 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 West Seattle CPA on October 9, 2013 · Leave a Comment
The following brief article discusses the many IRS tax forms needed as a property owner so as to completely record, and report, rental earnings to the IRS. Based on the particular legal business which possesses the property, the tax documents required will be different, as is discussed in this article (individual, partnership, corporation, or LLC). Read the article titled Best Rental Property Ownership, included in this Guide, for additional information relating to legal entity property ownership.
NOTE: You will find the different documents highlighted directly below on the Internal Revenue Service’s website: http://www.irs.gov/Forms-&-Pubs. All the required documents are included in any tax preparation software, if you’re using one of them.
Individual Ownership
Such as mutual property ownership with a husband or wife, tenancy in common, or shared tenancy with legal rights of survivorship.
Form 1040. All independent citizens need to submit Form 1040, and that is exactly where you should start. Your annual total leasing earnings or losses subject to taxation will appear at line 17 on the first page of Form 1040. You will not be able to employ the shortened Forms 1040A or 1040-EZ, as a law abiding landlord with leasing activity.
Schedule E. One addendum to Form 1040 that you must learn about is Schedule E. It really has various functions, and the function related to you is reporting of leasing income and costs. The only portion of Schedule E that you must finish is the section labeled “Part I”. There are several critical notes you need to remember, including: if you own the rental jointly with a person who isn’t your wife or husband, report only the revenue that you acquired as well as the expenditures that you suffered. Try to remember, furthermore, that you have to allocate expenditures between rental and non-rental use should you be leasing a share of your own personal residence, or when you only rented for a part of the calendar year. For more details, check out Tax Deductible Rental Property Expenses, the article collection that’s provided in this Guide.
Form 4562. At line 18 of Schedule E, you can deduct the depreciation on the rental, which you’ll employ Form 4562 to calculate. For additional advice, view the article called, Depreciation Expenses for Rental Property, that is provided in this Guide.
Partnership/Corporate Ownership
Including a general or limited partnership or S corporation.
Form 1065/1120-S. For people with a joint venture, you must employ Form 1065, the tax form a partnership utilizes to report each of its business activities. An S corporation employs Form 1120-S to report its enterprise operations. Schedule K, line 2 of Form 1065 or 1120-S is the place where the net rental loss or profits are reported (Those documents are embedded with Schedule K).
Form 8825. Form 8825 is designed for partnerships and S corporations, and it works just like Schedule E. Schedule E and Form 8852 are basically very much the same. Be sure that all profits and expenses sustained by the corporation or partnership are provided in their whole amounts (Later, these should be allotted to each investor or business partner).
Schedule K-1. This document reports the net rental revenue or deficit owing to each business partner or investor relative to that partner or investor’s rental property ownership interest. The elements of the K-1 given to every partner must be reported on her / his Form 1040, Schedule E, Part II.
Limited Liability Company (LLC) Ownership
You could file like you were an individual owner because, for income tax requirements, a single-member LLC is actually a disregarded entity (see above). A multiple-member LLC has the option to be taxed as either a partnership or as an S corporation (look above).
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.
There are few tax deductions for business owners that are more feared than the dreaded home office deduction. Some tax payers are convinced that claiming this deduction increases the likelihood of an audit, while the IRS is insistent that this is just not the case. Either way, if you abide by the rules, and maintain proper documentation, you should have no worries.
The key to this tax deduction is that owners of rental properties may claim this tax write-off if they are active, which is to say you must do more than cashing checks. If you consistently spend a substantial amount of time preparing and maintaining properties, you will likely qualify as an ACTIVE rental property owner.
If you meet the criteria for being an active rental property management the next requirement is that you must regularly use the office space exclusively for running your business as a rental property manager.
On top of that, you must meet at least one of the following criteria:
1. This home office must be your principle space for running your rental property business.
2. You must have no other location from where you run the administrative end of your property managment rental business.
3. You utilize the office to meet clients and potential clients.
4. You use a separate structure on your property for conducting business.
After you have applied the threshold tests above and determined that the work area in your home does in fact meet the requirements for the home office deduction, you will have to look into what kind of expenses are tax deductible. There are direct and indirect types. Direct expenses only benefit the home office area of your home, expenses such as painting or cleaning. Indirect expenses benefit the entire home and must be apportioned out between the home office space and the rest of your house. Property tax, insurance, mortgage interest, and utilities are common examples of indirect expenses. Square footage is the standard means 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 home 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 when the house is sold.
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 communication. And while using your home office to meet renters, it is wise to keep a log to keep track of meetings. You should keep insurance premium notices, mortgage interest statements, property tax statements, utility bills, and other appropriate 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.
Be sure to check out our Tax Experts page at Small Business Webcast, they are CPAs and accountants well versed in tax prep, bookkeeping, payroll services and business valuations too.
This portion of the Rental Property Tax Guide concentrates on the various deductible expenses of your gross rental income in order to calculate your net rental income. Given that there are so many deductible expenses, this guide divides the topic into four different types. This first part will look at interest, advertising, and professional fee expenses.
Interest
The primary type of interest you will most likely deduct is mortgage interest. 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’s a duplex and you’re residing in 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 Tax Guide for Landlords. Personal use mortgage interest will always go 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 write a lease or initiate legal proceedings in order to evict a renter, you may deduct these payments. Also you can deduct the fees of an accountant for preparing the Schedule E of your return from the year prior. Make sure to pro rate the total 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 realty groups for managing your rental property are deductible as well.
Seattle CPA +John Huddleston has written numerous articles on accounting and other tax related matters of interest to small business owners.
Posted by West Seattle CPA on January 17, 2013 · Leave a Comment
Some expenses incurred in preparing a property for rental (before actually renting) are tax deductible. So let’s look at a few of them.NOTE:These expenses outlined within this post aren’t the same variety of expenses allowable as a deduction under Internal Revenue Code section 195. Under the section 195, certain startup expenses (in an active trade or business) are deductible up to $5,000 with a balance amortizable over fifteen years. However, section 195 is inapplicable to rental property because renting isn’t regarded an active trade or business, but rather it is considered a passive activity. Find a great deal more information on active versus passive rules in the Tax Deductible Rental Losses article.Note: It is not just once you have actually rented real estate that rental activity commences, but when you have made the property available for rent.
The Expenses of Obtaining a Mortgage
Recording fees, mortgage fees, and abstract fees (amongst others) are capitalized and so become part of your basis in the property. Instead of expensing these fees all at once, you have to depreciate these expenses. The article Depreciation Expenses for Rental Properties has further information relating to depreciation.
Points
What are points? They are charges paid by a borrower to take out a mortgage or a loan. This points or charges may also be called origination fees, or premium charges, or maximum loan charges. Points are essentially prepaid interest. Thus, they are deductible as interest, but you cannot deduct the full amount at once. Rather, you must amortize the points over the life of the loan. Determining the amount of points to amortize per year, is task beyond the scope of this article. Schedule a date with a Seattle tax pro.
Improvements vs. Repairs
You need to capitalize and depreciate improvements to the property previous to putting the rental property on the market. Improvements prolong the use of the property or materially add to the property’s market value. On the other hand, you may freely deduct all repair expenses. A repair aims to keep your property in good working condition, not to increase the market value or prolong use.
Seattle Accountant +John Huddleston has written extensively on accounting and other tax related issues of concern to small business owners. He is a graduate of Washington State University and the University of Washington.
Posted by West Seattle CPA on January 3, 2013 · Leave a Comment
This article takes a look at the various types of entities for the ownership of rental properties. Below, you’ll see that different entities have their disadvantages and advantages. However, the goal in each case is to limit your liability and safety-guard your rental property from unsecured creditors.
Also seek the counsel of an accountant or Seattle CPA before establishing an entity and transferring ownership of a rental property. Do note, this guide isn’t a comprehensive replacement for specialized council.
TIP: Always consult with a certified public accountant or tax attorney prior to establishing an entity and transferring ownership of your rental property. This Guide is not meant to be a comprehensive solution you should seek the attention 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. The key disadvantage of this form of ownership is that your creditors may be able to force a sale of the rental property if they receive a court order, or they might compel you into involuntary bankruptcy. A main plus to this form of ownership is that the process is simple, without heavy filing fees or intricate forms.
Legal Entity Ownership
Legal entities include general partnerships, limited partnerships, limited liability companies, and corporations. The differences between the entities are important and outlined below. The major advantage to entity ownership is that your personal creditors are unable to force a sale of the rental, since you don’t own it. The only type of entity that does not require registration with the Secretary of State is the general partnership. For tax purposes, the entity type chosen does not matter too much because in most cases, income from the rental property “passes through” from the entity and is taxed on a personal tax return (but do note the cautionary note under corporations). See the article titled Necessary Tax Forms for Reporting Rental Activity, which is included in this Guide, for more details on 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 business for profit. In a general partnership, each partner has equal management rights, but is personally liable for the debts of this partnership. So, a general partnership is usually not ideal.
Limited partnership. A limited partnership is more tricky as this method of ownership involves one limited partner and at least one general partner. The limited partner will not be personally liable for any debts resulting from the partnership, but also has no management rights. The general partner has sole management rights, coupled with personal liability for the debts resulting from the partnership. This arrangement is also usually not advised.
Limited liability partnership/company. A limited liability partnership and a limited liability company are pretty similar entity types, both providing for limited liability to partners/members. This would mean you will not be personally liable for the entity’s debts, except in cases when the debt is due to your own wrongdoing. This form of ownership is often preferable because of limited liability plus there are not as many formalities which require observance than with corporations.
Corporations. This kind of ownership delivers limited liability and also allows for perpetual existence. Although this selection of ownership requires the upholding of specific formalities for you to maintain this limited liability status. So under this reasoning that LLCs and LLPs are commonly more desirable for your aims. Also worthy of noting is that corporations fall under one of two categorizations: s-corporation or c-corporation. When a corporate entity is taxed as a c-corp, then it will pay tax on rental income, and then you’ll pay tax (again) when the c-corp pays dividends. And it is preferred to avoid the double-taxation trap.
West Seattle Accountant +John Huddleston has written several articles on accounting and tax issues that small businesses face. He is a graduate of Washington State University and the University of Washington.
