Posted by Burien CPA on October 25, 2013 · Leave a Comment
Since you now are engaged in renting property to obtain revenue, it is essential for you to make sure that certain fees and professional services are correctly set up and documented for tax considerations. In this article, we are going to identify these fundamental expenses.
Insurance
Insurance payments are pre-paid before the given length of time. Illustration: You obtained insurance coverage on the rental property in March 2012 for $1200. April 2012 to March 31, 2013 would be the coverage duration of this insurance policy. Be aware that in this example, the present tax year is exceeded by the policy coverage time period. Therefore you will need to allot only current year relevant monthly premiums in relation to the current year taxes,and report the remainder for the next year. This would mean $900 (9 months April to Dec 2012) or $100 per month of eligible rental property utilization could be your tax deductible insurance premium.
Personal and business clients can often find a mark down rate if their insurance company is able to bundle their insurance premium packages. Only the company rental property pertinent portion will be deductible. The individual and non business utilization could be tax deductible on your individual income tax return. Finally, Title Insurance isn’t applicable as an expense and has to be included in the Cost Basis of the rental property.
Cleaning and Maintenance
The day to day maintenance of the rental property is a deductible expense granted it is for commonly used areas and day to day cleanliness. Even so, the expenses are only allowable when they are not on personal use days, but they are on allowable leasing times. To make sure that the rental property is in good shape and running order, you can do what a number of other property owners do, and hire a local hired company to keep up with the rental property. These types of services will provide a variety of expert services such as standard maintenance, dusting furniture, washing windows, and cleaning appliances. Major structural improvements and modifications are not deductible, so will have to be included in the property’s Cost Basis.
Repairs
There are often tasks which do not require major renovation of the structure of the property such as repainting or machine repair. Depending on the rental duration, you are able to write off such required and normal expenses.
It is important to be aware that these kinds of costs which are usually allowable against the earnings of the property, you mustn’t include the periods of time which are considered individual days of use. The only expenditures that are allowed are the ones that are associated with the authorized rental period, directly.
- You can obtain the documents defined within this information at the IRS’s webpage. If you’d like further information, view IRS Publication 527.
Woodinville 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 Burien CPA on October 17, 2013 · Leave a Comment
You may write off travel expenses if they are ordinary and necessary. If you are using your own motor vehicle to maintain and manage a property and/or collect rental payments from occupants, you may deduct these costs. As commuting to work is seen as a private cost, this is not permitted for tax deduction. Likewise, you may not deduct travel expenses related to making improvements on your property. This is normally recoverable using a cost recovery process such as depreciation.
Actual Expenses
Under this solution you may deduct all travel expenses tied directly to your property. All these costs needs to be documented and backed up by invoices in line with IRS Publication, 463 Chapter 5. A few software program apps can be bought by using iPod, Quick Books, Mint, and so on which will help you; nevertheless, you need to maintain physical reports to validate your deductions. This data should be claimed on either a Schedule C or Schedule E. If you own more than one property, the expenditures will have to be allotted to each individual residence where the expenses were incurred. Do not incorporate any kind of personal use or any other type of use apart from that specifically relevant to the property.
Mileage Method
You write off your actual distance traveled. You would utilize the existing standard mileage tax rate of $0.55.5 per mile traveled that tax year.
Using local transportation including Zip Cars, metro bus companies, and auto rentals must have an immediate relationship to the property, and you must have documentation to support that. If opting for public transit, it is recommended that you maintain a record of such expenses. It is a good idea to apply rental car and Zip Car expenses to a business account tied directly to your rental property.
- You can obtain the different documents outlined in this information on the IRS’s webpage. Check with IRS Publication 527 for additional information.
Woodinville 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 Burien CPA on October 9, 2013 · Leave a Comment
As a property manager, to fully account for and report your annual leasing profit to the IRS, you will need various Internal Revenue Service tax forms which you’ll find explained within this short article. As is discussed here, the tax forms considered necessary vary depending on the type of authorized company that is the owner of the rental (individual, partnership, corporation, or LLC). Look at the page called Best Rental Property Ownership, found in this Guide, for more relating to legal entity rental property ownership.
NOTE: You’ll find the documents outlined in the next paragraphs on the Internal Revenue Service’s webpage: http://www.irs.gov/Forms-&-Pubs. All of the required forms will likely be available in any tax preparation computer software, if you are using one.
Individual Ownership
Which includes shared rental property ownership with a spouse, tenancy in common, or joint tenancy with rights of survivorship.
Form 1040. Foremost, you’ll require Form 1040, the document used by all individual people. Your own net rental property earnings or deficit subjected to taxation will be found on line 17 of the first page of Form 1040. Please note that as a law abiding landlord with leasing income and expenses, you are not allowed to utilize the simplified Forms 1040A or 1040-EZ.
Schedule E. Schedule E is an addendum of Form 1040. Of its numerous usages, just the purpose of reporting rental property profits and expenditures is applicable to your needs. The one element of Schedule E you have to fill out is the section marked “Part I”. There are many relevant notes you should be aware of, for example: if reporting on a rental you jointly own with a partner, who isn’t your spouse, you only have to report the expenditures that you incurred plus the revenue that you earned. Try to remember, additionally, that you’ll have to allocate expenses between rental and non-rental usage if you are leasing a segment of your own private residence, or whenever you leased only for part of the year. For additional information, find Tax Deductible Rental Property Expenses, the article series that is with this Guide.
Form 4562. Form 4562 must be used to quantify depreciation of your property, which you’ll deduct on line 18 of Schedule E. For more advice, find the article titled, Depreciation Expenses for Rental Property, that is available in this Guide.
Partnership/Corporate Ownership
A general or limited partnership, or S corporation is included.
Form 1065/1120-S. For people with a collaboration, you need to fill out Form 1065, the tax form a collaboration utilizes to report everyone of its company activities. Form 1120-S is employed by an S corporation to report business activities. Schedule K, line 2 of Form 1065 or 1120-S is where your own total leasing financial loss or earnings are going to be reported (Such forms are incorporated with Schedule K).
Form 8825. Form 8825 is designed for partnerships and S corporations, yet functions similar to Schedule E. Schedule E and Form 8852 are in essence very similar. Always include complete sums of all earnings and expenditures accrued by the partnership or corporation (In the future, these are going to be divided among each investor or business partner).
Schedule K-1. The total rental property earnings or losses due to each investor or business partner is reported by this form, in accordance with the ownership interest of each investor or business partner. The information of the K-1 sent to every partner will have to be reported on their own Form 1040, Schedule E, Part II.
Limited Liability Company Ownership
You’ll be able to file just like you are an individual owner because, for tax purposes, a single-member LLC is a disregarded entity (look above). A multiple-member LLC may choose to be taxed as either 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.
Filed under Landlord's Tax Guide · Tagged with 1120-S, Corporate Ownership, Form 1040, Form 1065, Form 4562, Form 8825, Individual Ownership, llc, Partnership Ownership, Schedule E, Schedule K-1
Posted by Burien CPA on May 13, 2013 · Leave a Comment
There are few tax deductions taken by business owners that are more feared than home office deductions. Some tax experts are convinced that claiming this deduction increases the chance of an audit, although the IRS is adamant that this isn’t the case. Either way, if you follow the rules, and maintain proper records, you should have no worries.
To claim this deduction you must be active (beyond depositing monthly checks). If you routinely 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 exclusively for running your business as a rental property manager.
Additionally, you must meet one of the following requirements:
1. Your home office is used as your principle place of business.
2. There is no other fixed location where you perform administrative and management activities.
3. This office space also serves as meeting location for clients.
4. You use another structure on your property to conduct business.
After you have applied the threshold tests above and determined that the work area in your home does in fact qualify for the home office deduction, you have to look into what kind of expenses can be written off. There are direct and indirect types. Direct expenses only benefit the home office area of the home 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. Mortgage interest, insurance, property taxes and utilities are examples of indirect expenses. Square footage is the usual 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 you sell the house.
As you don’t want any trouble if you do get audited, you want to keep careful records to demonstrate that you were/are entitled to take the deduction and that the claim has been accurately reported. You should document the home office space by a diagram and/or photograph that supports your calculations. It is wise to use your home office address on company 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 to keep proving expenses include: property tax statements, utility bills, insurance premium notices, 1098 mortgage interest statements and receipts for other relevant home office expenses.
Home office deductions can get complicated. Please do not consider this to be reasonable solution to the informed counsel of seasoned Seatac CPA. But this should help you gain a basic understanding the requirements of successfully claiming home office deductions.
Renton 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 Burien CPA on February 19, 2013 · Leave a Comment
There are several deductible expenses linked to owning a rental property. In this write up we will focus on expenses regarding professional fees, interest, and advertising, these are expenses you may deduct from gross rental income in order to calculate the 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
If you pay a lawyer to make a lease or start legal proceedings for you to evict a tenant, you can deduct these payments. You may also deduct the fees of a tax accountant for the preparation of the Schedule E of your return from the year prior. Be sure you pro rate the overall 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 the rental property are deductible as well.
Seattle Accountant +John Huddleston has written prolifically on accounting and other tax related topics concerning small business owners. He is a graduate of Washington State University and the University of Washington School of Law.
Posted by Burien CPA on January 8, 2013 · Leave a Comment
This post examines deductible rental startup expenses. You are able to deduct certain expenses incurred as you prepare your rental property, that is prior to actually letting it.
Note: The expenses reviewed within this post are not the same types of expenses that qualify as a tax write-off under Internal Revenue Code section 195. Under this section, particular expenses incurred as startup expenditures of an active business or trade are deductible up front up to $5,000, with a balance amortizable over a fifteen-year period. However, in this section of the Internal Revenue Code, rental activity isn’t included because rental activity is considered a passive activity not as an active trade or business. Find more information on passive versus active rules in the article entitled Tax Deductible Rental Losses.
Note: It isn’t just when you have actually rented a property that rental activity commences, but when you have made the property available for rent.
Obtaining a Mortgage Expenses Incurred
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 that you must depreciate such expenses, instead of expensing them all at once. See the article entitled Depreciation Expenses for Rental Property, included in this Landlord Tax Guide, for a more in depth discussion on depreciation.
Points
“Points” are charges paid by a borrower to take out a loan or a mortgage. 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 sit-down with a CPA.
Repairs vs. Improvements
You need to depreciate and capitalize all improvements you make to the property prior to putting the rental property on the market. Improvements prolong the use of the property or materially increase the market value of the property. 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.
Burien Accountant +John Huddleston has written extensively on accounting and other tax related matters. He is a graduate of Washington State University and the University of Washington.
Posted by Burien CPA on December 26, 2012 · Leave a Comment
This article of the Landlord’s Tax Guide (Guide) discusses the various types of entities for the ownership of rental properties. Below, you’ll see that the different entities have different advantages and disadvantages. Regardless, the goal is to limit your liability and protect your property from any unsecured creditors.
TIP: To establish one of the entities discussed below, registration forms must be filed with the Washington Secretary of State’s office. These forms are available at: Washington Entity Registration
Note: This landlord tax guide wont serve to replace the competent council of a Seatac CPA or attorney. You should seek qualified professional help when setting up an entity and transferring ownership of a rental property.
Individual Ownership
This is the more common and the most straight forward method 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 advantage here is that this is simple, straightforward, and doesn’t require you to file any complicated paperwork or filing fees. The big disadvantage to this form of ownership is that your creditors are able to force a sale of the rental property if they receive 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 these entities are important. We’ll outline them below. The main advantage to entity ownership is that your personal creditors can’t force a sale of the rental property, 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 type of entity chosen does not matter a tremendous amount because in most cases, income from the rental property “passes through” from the entity and is taxed on your 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 tax guide for landlords, for more on how rental income is taxed.
General partnership. A 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 will have equal management rights, and are personally liable for the debts of the partnership. And regarding that liability, a general partnership is generally not recommended.
Limited partnership. A limited partnership is more complicated considering the fact that this method of ownership involves at least one general partner and one limited partner. The limited partner will not be personally liable for the debts of the partnership, but also has no management rights. The general partner has sole management rights, as well as personal liability for the debts resulting from the partnership. This arrangement is also generally not suggested.
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 of them provide limited liability to the members/partners. This would mean that you are not personally liable for the debts of the entity, that is, unless debts are resultant from your own wrongdoing. This form of ownership is preferable as it lessens liability and presents with fewer formalities than those of the corporation.
Corporations. This type of ownership offers limited liability and also allows for perpetual existence. Although they also require the upholding of specific formalities so that you can maintain the limited liability status. Thus under this reasoning that LLCs or LLPs are commonly more suiting to your purposes. Also worth mentioning is that corporations are categorized as either s-corp or c-corp. When a corporation is taxed as a c-corporation, then it will pay tax on rental income, and then you will pay tax (again) when the corporation pays dividends. And it’s preferable to side-step the double-taxation trap whenever possible.
Accountant +John Huddleston is a graduate of Washington State University and the University of Washington. He has written extensively on numerous tax related topics.
