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Learn the Difference NOW!

Author: Keith Huggett

Income and losses from investment real estate or rental property are passive by definition — unless you’re a real estate professional. Why is this important? Passive income may be subject to the 3.8% net investment income tax (NIIT), and passive losses are deductible only against passive income, with the excess being carried forward.

To qualify as a real estate professional, you must annually perform:

• More than 50% of your personal services in real property trades or businesses in which you materially participate, and
• More than 750 hours of service in these businesses during the year.

Each year stands on its own, and there are other nuances. If you’re concerned you’ll fail either test and be subject to the 3.8% NIIT or stuck with passive losses, consider increasing your hours so you’ll meet the test. (Special rules for spouses may help.) Also be aware that the IRS has successfully challenged claims of real estate professional status in instances where the taxpayer didn’t keep adequate records of time spent.

If you’re not sure whether you qualify as a real estate professional, please contact us. We can help you make this determination and guide you on how to properly document your hours.

What to do with your Vacation Home after Vacation

Author: Keith Huggett

Vacation time is over and your family is getting ready to return to life in the faster lane.  What do you do with your vacation home? Will you close it up for the rest of the year? Will you rent it out so that others may benefit?  If you choose to rent out your vacation home, there can be tax implications.

Rental Income - Rental income in general is taxable.  If you rent out your vacation home for less than 14 days, the income is tax free.  If your renter stays more than 14 days you need to report the income on your tax return. You can deduct rental expenses, but your deductions are limited because the amount of expenses you can deduct depends on whether the property is a business or a personal residence in the eyes of the IRS. The IRS determines this by calculating the proportion of personal use to the amount of time you rent the property.  If you use your vacation property for less than 14 days or less than 10% of the time you rent the property, the IRS classifies your rental as a business.  If you use your property for longer than the 14 days or 10% of the time it is rented, the IRS will classify your rental as a personal residence.

Deductions - Renting out your property will also incurr some expenses.  Depending upon how the IRS classifies your property will define what you can claim as a deduction. If classified as a business, you have to apportion eligible deductible expenses (i.e., cleaning, repairs, utilities) according to the amount of personal or rental usage. To determine the percentage of expenses you can deduct, divide the number of days rented by the total number of days of used (personal days plus rental days). Once you have that, your expenses can be itemized on your tax return.

If your rental is classified as a personal residence, you are able to deduct things like property tax and mortgage interest along with the itemized expenses.

Record Keeping -  As always, it is important to keep accurate, detailed records.  Items you will want to keep include receipts and invoices, mortgage statements and the like. Keeping a record of all improvements and repairs made to the rental is also of high importance. Having a separate checking account especially for the rental property can make documenting your rental expenses easier.

Audit Proofing Your Rental - Always treat your rental as a business. To keep the IRS uninterested in you, you need to make sure that you look like a business. Keep clean books, have separate bank accounts, and make sure you keep accurate records of repairs. Keep those receipts.  “Audit-proof” your rental property just as you would “baby-proof” your home, it just might keep both you and your property a little bit safer.

If you have any questions regarding renting out your rental property, please contact us.  The specialists at The Tax Office, Inc., can provide you with answers, show you what deductions are available to you and much more.

A Deductions Checklist...

Author: Keith Huggett

Many people, including real estate professionals,  don’t fully appreciate just how much money they can save with tax deductions.  Almost everything you buy for your real estate business is tax deductible as long as it is ordinary and necessary and the cost is reasonable. These deductions can really add up as savings for your business. There are dozens of possible tax deductions for real estate professionals.

• Advertising – The costs of signs and advertisements for the rental property.

• Auto – Landlords are entitled to a tax deduction whenever they drive anywhere for their rental activity. Keep a mileage log to track your starting location, destination, purpose, and mileage. Using a mileage app on your smart phone can simplify this task.

• Depreciation –  Landlords get back the cost of real estate through depreciation. This involves deducting a portion of the cost of the property over many years.

• Equipment / Computers / Furniture – These items are only deductible to the extent used for business. These are capitalized and deducted through depreciation over time.

• Home Office – Working from a home office allows you to deduct a portion of your home mortgage interest, homeowner’s insurance, utilities and property taxes toward your rental business. This is true whether you own your home or apartment or are a renter.

• Home Owner’s Association Dues – HOA's often charge association dues.  These dues are used to provide maintenance services for the home owners.  Renting out your property makes these fees deductible for rental activities.

• Interest – You can claim the mortgage interest paid on loans used to acquire or improve rental property and interest paid on credit cards used to purchase goods or services used in a rental activity.

• Insurance – You can deduct the premiums you pay for almost any insurance for your rental activity. This includes fire, theft, and flood insurance for rental property, as well as landlord liability insurance.

• Lawn Service / Pest Control / Carpet Cleaning – The cost of services not paid for by a tenant are deductible.

• Professional Fees – Any costs you pay to an attorney for eviction, a management company, engineer or CPA, etc. are deductible as they relate to the rental business.

• Repairs – Repairs may be expensed (deductible this year) OR capitalized and depreciated (deducted over many years) depending on the size and nature of the expenditures. There is a difference between making repairs and making improvements on your home.

• Telephone – Only the business portion of your phone usage is deductible.

• Utilities –  If utilities not paid by the tenant, these costs can also be deducted.

Making Rentals Less Complex

Author: Keith Huggett

As the 2013 "fiscal cliff" approaches, many small businesses are taking a closer look at their tax strategies. For those in the real estate and rental businesses, income tax returns have always been a bit complex. This year, more than ever, it is essential that you follow sound tax strategies for landlords in order to take advantage of expiring credits and deductions without getting caught in an audit.

Here are few basic tax strategies for landlords that may make end-of-the-year forms and reports easier:

• Understand deductions: There are numerous deductions currently available for individuals and businesses with rental properties. You can deduct interest paid on property loans, similar to the deduction received by single-family home owners. You can also claim a deduction related to the depreciation of property. In addition to property-based deductions, landlords can also claim expenses. Insurance premiums associated with your property and travel expenses that are incurred maintaining properties can be deducted. There are limitations on these deductions, so be sure you understand the tax code or seek professional assistance in preparing returns.
• Avoid common mistakes: Small, family-owned companies often make common mistakes in business management, such as mixing personal and business accounts. Keeping finances and expenses separate not only decreases the work come tax time, it also reduces the chance of a mistake or an audit.
• Create easy access to data: Cloud computing now offers easy tax strategies for landlords. Technology that was previously available only to large businesses can now be accessed by individuals and small companies. With cloud computing, you can share financial data with professional accountants or access all your records from any location and at any time. Instant access to and organization of records reduces the time your income tax forms take and decreases the likelihood of a mistake.