Posted by Federal Way CPA on October 28, 2013 · Leave a Comment
Since you now are currently renting your property out to obtain revenue, it’s very important that you ensure a number of charges and professional services are properly set up and recorded for IRS considerations. Below, we will name some of these fundamental expenses.
Insurance
Just like most premiums, this is usually prepaid beforehand for a certain length of time. Illustration: You bought insurance coverage for the property in March 2012 for $1200. April 2012 to March 31, 2013 would be the protection lifetime of this insurance policy. Note that with this scenario, the present tax year is exceeded by the insurance plan coverage time period. This means that you must allot only present tax year pertinent monthly premiums in relation to this year’s tax records,and document the rest for the upcoming year. This would mean $900 (9 months April to Dec 2012) or $100 per month of eligible rental utilization is the permitted premium.
Personal and business customers will often find a discounted price if the insurance carrier wants to combine their premium plans. You have to ensure you just allocate the portion that is pertinent to your business rental property from this tax deduction. You may use your own income tax return to deduct any non-business or private use. Lastly, Title insurance isn’t applicable as an expenditure and has to be part of the Cost Basis of the property.
Cleaning and Maintenance
The daily maintenance of the rental property is an allowed expenditure given it is for common spaces and everyday cleanliness. Still, the costs will only be allowable if they are not on personal use days, but are on allowed rental times. To make sure that the property is in good shape and running order, you can do what a number of other rental property owners do, and engage a local area hired company to keep up with the rental property. This might include things like such professional services as window cleaning, dusting furniture, cleaning home appliances and repairs. Just these types of professional services are permitted, any sort of major structural improvements or modifications have to be allocated to the Cost Basis of the property.
Repairs
There are frequently projects which don’t require major renovation of the structure of the property such as painting or appliance repair service. In accordance with the rental duration, you’ll be able to write off these kinds of important and typical expenditures.
Do not ever include any kind of periods which will be considered to be individual use times, because costs are only deductible in relation to the income of the property. The only expenses that are allowed are those that are relevant to the approved rental time period, specifically.
- On the IRS’s internet site, you’ll find a variety of documents you may need. Consult IRS Publication 527 for more information.
Bellingham 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 Federal Way CPA on October 17, 2013 · Leave a Comment
Travel with your own private car as well as other forms of local transportation are often deductible if they’re considered ordinary and required. If you use your own personal vehicles to maintain and manage a leasing property, and also to secure income from occupants, you might be allowed to deduct these kinds of costs. Please be aware driving to and from work is seen as a personal expense which is not allowed. Also, you can’t write off travel costs undertaken in order to provide improvements on a property. A cost recovery process like depreciation will normally deal with that.
Actual Expenses
Here you may deduct all expenses associated with your rental property. IRS Publication 463, Chapter 5 describes how all of these costs will have to be reported and supported with receipts. Certain software applications can be bought via iPod, Quick Books, Mint, and more which will help you keep track of your files; nevertheless, you will still need to maintain a touchable report to backup your write offs. It is required these details be reported, along with supporting documents attached, on either a Schedule C or Schedule E. For people with two or more rental properties, your expenditures must be allotted to the residence in which the expenses accrued. Remember to not incorporate any kind of personal use or any other type of use except that specifically associated with the rental property.
Mileage Method
All miles traveled during the course of the year are deductible. For example, if you traveled 1200 miles during 2012, you would use the present standard mileage rate of $0.55.5 per mile based on existing tax rates to deduct the total.
You need paperwork to support all deductions regarding area transportation like motor vehicle rentals, metro bus companies, and Zip Cars exclusively connected to the real estate property. If employing public transit, it is strongly suggested that you maintain records of usage. If using Zip Cars or rental cars, place these costs in a business account tied directly to your rental properties.
Quick Note: You can obtain the different documents outlined in this information on the IRS’s webpage. To find out more please check with IRS Publication 527.
Tacoma 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 Federal Way CPA on October 9, 2013 · Leave a Comment
This valuable short article is focused on the many Internal Revenue Service tax documents you’ll need as a property owner so that you can fully record, and report, your rental earnings to the IRS. According to the type of authorized organization who is the owner of the rental, the tax documents needed vary, as discussed in this article (individual, partnership, corporation, or LLC). For for additional info regarding legal entity property ownership, find the article included in this Guide, called Best Rental Property Ownership.
TIP: You’ll find all of the forms discussed here on the IRS’s website: http://www.irs.gov/Forms-&-Pubs. Each of the necessary forms are going to be contained in any tax preparing software, if you use one.
Individual Ownership
Mutual ownership with a husband or wife, shared tenancy with right of survivorship, and also tenancy in common are included in this.
Form 1040. First and foremost, you will have Form 1040, the tax form filed by all independent tax payers. The net leasing profits or loss subject to taxes will be at line 17 in the very first page in Form 1040. Note that as a property manager with rental income and expenses, you are not allowed to take advantage of the shortened Forms 1040A or 1040-EZ.
Schedule E. Schedule E is a certain addendum of Form 1040. Of its many different usages, only the usage of reporting leasing profit and costs is important to your needs. The one section of Schedule E that you need to fill out is the part titled “Part I”. Several critical tips to bear in mind: if you ever own the rental property together with a person who is not your husband or wife, report about the revenue which you collected plus the expenditures that you suffered. Furthermore, bear in mind that if you rented for only part of the calendar year, or if you are actually leasing a segment of your own private house, you will have to allocate expenses relating to rental and non-rental purposes. See the compilation of articles titled Tax Deductible Rental Property Expenses, available within this Guide, for additional advice.
Form 4562. At line 18 of Schedule E, you’ll be able to deduct the depreciation on your rental, that you will use Form 4562 to figure out. See the article entitled Depreciation Expenses for Rental Property, included in this Guide, for more advice.
Partnership/Corporate Ownership
A general or limited partnership or S corporation is included.
Form 1065/1120-S. When you’ve got a partnership, you have to fill out Form 1065, the form a joint venture employs to report each of its organization operations. Form 1120-S is employed by an S corporation to report enterprise operations. Your current net rental property profit or deficit will be reported on Schedule K, line 2 of Form 1065 or 1120-S (Those forms are incorporated with Schedule K).
Form 8825. Form 8825 is designed for partnerships and S corporations, and it works like Schedule E. Schedule E and Form 8852 are fundamentally very similar. Make certain that all profit and operating costs accrued by the corporation or partnership are included in their full amounts (Down the road, these should be allocated to each shareholder or business partner).
Schedule K-1. The total rental property profit or financial loss due to each investor or business partner is reported by this form, in line with the property ownership interest of each shareholder or partner. The information of the K-1 received by each individual business partner has to be reported on her or his Form 1040, Schedule E, Part II.
LLC Ownership
A single-member LLC is really a disregarded entity for tax usage, meaning that you may file as if you were an independent owner (notice above). A multiple-member LLC can decide to be taxed as a partnership or as an S corporation (notice above).
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.
There are few tax deductions for business owners that are more feared than home office deductions. Some business owners are convinced that claiming this deduction increases the odds of an audit, although the IRS is insistent that this just isn’t the case. Either way, if you follow the rules, and maintain proper documentation, you should have no worries.
The key to this deduction is that rental property owners may claim this write-off if they are active, which is to say you must be doing more than cashing checks. If you routinely 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 only 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 have no other fixed location where you perform administrative and management activities.
3. This space also serves as meeting location for your clients.
4. You use another structure on your property to conduct 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. While direct expenses benefit the home office space only. Examples of direct expenses could be cleaning or painting expenses. While examples of indirect expenses can be payments on mortgage, property tax, and utilities, these expenses are apportioned out between the office and the rest of your home. This percentage is normally calculated by the square-footage ratio. To demonstrate, a 2,000 square foot home with a 200 square foot office space would mean that 10% of indirect expenses would count toward home office deduction expenses.
And you will want to ensure that you are keeping meticulous records in case there is an 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 clients, it is wise to keep a record of meetings. You should keep utility bills, mortgage interest statements, insurance premium statements, property tax statements, 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 Federal Way CPA/Bookkeeper. But this should help you gain a basic understanding the requirements of successfully claiming home office deductions.
Seatac 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 Federal Way CPA on February 20, 2013 · Leave a Comment
There are quite a few deductible expenses involved in owning a rental property. Here we will expand on expenses regarding interest, advertising, and professional fees, these are expenses you might deduct from gross rental income in order to calculate the net rental income.
Interest
The primary type of interest you will most likely deduct 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. Whereas, whenever you are renting a room in your own home, or if it is a duplex and you are occupying the other unit, you need 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 always goes on Schedule A of your Form 1040 (not on Schedule E). Moreover, 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. 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 a legal representative to draft a rental agreement or start legal actions to evict a renter, you’ll be able to deduct these payments. Additionally you can deduct fees paid to a tax accountant for the preparation of the Schedule E of your return from the year before. 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 commissions or management fees to realtors for managing the property are deductible as well.
Des Moines CPA +John Huddleston has written numerous articles on accounting and other tax related issues that face small business owners. He is a graduate of Washington State University and the University of Washington.
Posted by Federal Way CPA on January 10, 2013 · Leave a Comment
Particular expenses incurred in readying a rental property (previous to actually letting the rental property) are deductible. Let’s take a look at a few of them.
Note: Startup expenses laid out here, differ from the expenses which are deductible (in section 195 of the Internal Revenue Code.) Under section 195, a number of startup expenses (in an active business or trade) are deductible up front up to $5,000 with this balance amortizable over fifteen years. However, section 195 does not apply to rental property this is because renting isn’t considered an active trade or business, but rather it is perceived as a passive activity. See the article Tax Deductible Rental Losses, included in this Guide, for more on passive activity rules.
NOTE: “Rental activity” starts the moment you make the property available for rent and place it on the market, not when you have actually have a renter or a tenant.
Obtaining a Mortgage Expenses Incurred
Expenses such as recording fees, mortgage commissions, and abstract fees, are capitalized and become part of your basis in the property. And this means you have to depreciate these expenses, instead of expensing them all at once. See the Depreciation Expenses for Rental Property article, included in this rental property tax guide, for more 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. Talk with a Certified public accountant.
Improvements versus Repairs
You need to depreciate and capitalize improvements to the property in advance of putting the 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.
Tax Accountant +John Huddleston
Posted by Federal Way CPA on January 10, 2013 · Leave a Comment
Certain expenses incurred while preparing a property for rental (previous to ultimately letting the rental property), are tax deductible. So let’s look at a couple of these expenses.
NOTE: These startup expenses we will look at within this piece of writing will not be the same sort of expenses that qualify as a deduction under Internal Revenue Code section 195. Within this section 195, particular expenses incurred as startup expenditures of an active trade or business are deductible up front up to $5,000, with the balance amortizable over fifteen years. However, in this section of the Internal Revenue Code, rental activity is not included because rental activity is deemed a passive activity not an active business or trade. Find more information on this in the article entitled Tax Deductible Rental Losses.
Note: It is not when you have literally rented real estate that rental activity “begins”, but when you make the property available for rent.
The Expenses in Obtaining a Mortgage
Expenses such as mortgage commissions, abstract fees, and recording fees, are capitalized and develop into part of your basis in the property. This means you have to depreciate these expenses, rather than expensing them all at once. See the article entitled Depreciation Expenses for Rental Property, included in this Landlord Tax Guide, for further study of 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 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. Talk to a tax professional.
Repairs vs. Improvements
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. Repair expenses, on the other hand, you may freely deduct. A repair aims to keep your property in good working condition, not to increase the market value or prolong use.
Tax Accountant +John Huddleston has written several dozen articles on accounting and other tax related subjects. He is a graduate of the University of Washington School of Law, with a Juris Doctorate and a Masters in Tax Law.
Posted by Federal Way CPA on December 26, 2012 · Leave a Comment
Let’s begin by looking at the different entity selection types that are available. Each has pros and cons. As a rule of thumb, you’ll aim to protect your property from unsecured creditors and limit your liability. So let’s unroll the list and see what our options are.
TIP: To establish one of the entities discussed below, registration forms must be submitted with the Washington Secretary of State’s office. These forms are available at: SOS.WA.GOV.
TIP: Consult with a tax attorney or certified public accountant before establishing an entity and transferring ownership of a rental property. This Guide isn’t meant to be a comprehensive solution you should seek the care of a qualified professional.
Individual Ownership
This is the more common and the most straight forward form of ownership and occurs when you purchase a 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 and simple, for one it does not require the filing of any complicated paperwork or pay any heavy filing fees. The principal disadvantage to this form of ownership is that your creditors could force a sale of the rental property if they receive a court judgment against you, or force you into an involuntary bankruptcy.
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 main advantage to entity ownership is that your personal creditors are not able to force a sale of the rental, considering 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 entity type chosen does not matter a whole lot because in most cases, rental income “passes through” from the entity and is taxed on a personal tax return (but do note the cautionary note under corporations). Read the article entitled Necessary Tax Forms for Reporting Rental Activity, which is included in this Guide, for more details on how rental income is taxed.
General partnership. A partnership is an association of two or more people to carry on as co-owners of a for-profit business. In a general partnership, each partner will have equal management rights, and are personally liable for the debts of the partnership. And as regards that liability, a general partnership is in general not ideal.
Limited partnership. This entity is more complex than a general partnership because it requires both one limited partner and a general partner. The general partner has sole management rights, and personal liability for any resultant debts. Whereas, the limited partner isn’t personally liable for debts of the partnership and additionally is without management rights.
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 and partners. This would mean that you are not personally liable for the debts of the entity, that is, unless the source is your own wrongdoing. This form of ownership is often superior as it will reduce liability and reveals fewer formalities than those of the corporation.
Corporations. Corporations permit limited liability and perpetual existence. Although, they demand the observance of unyielding formalities so as to sustain the limited liability guard. In the absence of these formalities, a court may very well “pierce the corporate veil” and hold you personally responsible. It is for this reason that LLCs and LLPs are usually more desirable for your purposes. Additionally, for the purpose of taxation, corporations are split into c-corporations and s-corporations. When the corporation is taxed as a “C” corporation, it pays tax on rental income, and then you will pay tax once more when the corp pays you dividends. You should obviate this “double taxation” loop.
CPA +John Huddleston has written many tax and finance related articles. He holds a masters in tax law and a juris doctorate from the Universityf of Washington School of Law.
