Posted by Seattle CPAs on October 28, 2013 · Leave a Comment
You should determine that all services and fees are set up correctly and fully documented for the objectives of taxation conformity, now that you have chosen to rent out your property for income. We will look at a few of these expenditures.
Insurance
Insurance coverage installments are prepaid prior to the specified time frame. Scenario: You purchased insurance coverage on the property in March 2012 for $1200. The policy period is from April 2012 to March 31, 2013. As the insurance coverage period will surpass the present tax year, you need to apportion and identify the insurance premiums applicable for this present tax year only and then bring forward the rest for the upcoming filing period. This could mean $900 (9 months April to Dec 2012) or $100 per month of qualified rental use could be your permitted premium.
You should be aware that some Insurance carriers commonly bundle premium plans between business and personal clients at a discounted charge. You should ensure that you only allot the portion which is pertinent for your company rental property from this tax deduction. The personal and non business utilization may be deductible on your personal tax return. Finally, Title insurance is not suitable as an expense and must be included in the Cost Basis of the property.
Cleaning and Maintenance
The day to day maintenance of the rental property is a deductible expenditure provided it’s only for common places and routine cleanliness. Even so, the costs are only deductible if they are not on personal use days, but they are on allowable rental days. To ensure that the property is in great condition and running order, you can do what many other rental property owners do, and hire a local contracted company to keep up with the property. This might include things like such professional services as window cleaning, dusting, appliance cleaning and upkeep. Only these sorts of professional services are permitted, any kind of structural maintenance and/or alterations have to be allotted to the Cost Basis of the property.
Repairs
There are sometimes jobs which do not require major reconstruction of the structure of the property like painting or machine repair. These kinds of costs which are typical and important are allowable depending on the rental length of time.
You have to realize that these kinds of costs which are normally allowable in relation to the income of the rental property, you mustn’t include those periods of time which are regarded as individual times of use. The only expenditures that are authorized are those which are associated with the approved rental period, specifically.
You can acquire the various forms outlined in this article on the IRS’s website. If you’d like additional information, view IRS Publication 527.
Bothell 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 21, 2013 · Leave a Comment
If your specialized travel costs of your personal automobile or another form of transportation are normal, needed, and reach a few particular factors, they may be deducted. Should you use your personal motor vehicle to maintain and manage your rental premises, or even secure rental money from inhabitants, you’ll probably be able to write these expenses. Since commuting is seen as a private expense, this is not permitted for tax deduction. Besides that, you won’t deduct the expenses of travel to make improvements to residences. That’s commonly recovered under a cost recovery system such as depreciation.
Actual Expenses
The expenses which are related to having to travel away from home in association with the leased property will be reported with this method. IRS Publication 463, Chapter 5 stipulates exactly how these kinds of expenses should be reported and supported with receipts. A number of software program applications are available from iPod, Quick Books, Mint, as well as others to help back up your files; however, you will need to still have a tangible document to validate all deductions. It’s essential that these records be documented, along with supporting forms attached, on either a Schedule C or Schedule E. All expenses must be allotted to the individual residences where the expenses incurred, if you own more than one rental property. Only vehicle use involving the rental property is tax deductible, so please remember not to add in any sort of private or any other costs that aren’t associated with your rental properties on the documents.
Mileage Method
According to this process you write off the cost of your actual mileage driven. You’d use today’s standard mileage tax rate of $0.55.5 per mile.
You have to have proof to support the cost of local travel such as vehicle rentals, metro bus service, and Zip Cars that you declare are specifically related to the real estate property. To demonstrate the fact that public transit use is exclusively business associated, it is suggested that keep documentation of all travel costs and allocate these costs to a business account tied directly to your rental property business.
For additional information please consult IRS Publication 527.
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 11, 2013 · Leave a Comment
This important article concentrates on the many Revenue Service tax documents you’ll require as a property manager so that you can properly record, and report, your annual leasing profit to the Internal Revenue Service. In accordance with the kind of authorized organization which manages the rental, the tax forms called for vary, as is discussed in the following paragraphs (individual, partnership, corporation, or LLC). For more concerning legal entity ownership, find the article in this Guide, called Best Rental Property Ownership.
NOTE: The various documents discussed in the next paragraphs are located on the Internal Revenue Service’s webpage, at: http://www.irs.gov/Forms-&-Pubs. All the required forms are going to be available in any tax preparation computer software, if you have one.
Individual Ownership
Such as joint property ownership with a significant other, tenancy in common, or shared tenancy with legal rights of survivorship.
Form 1040. Foremost, you need Form 1040, the document used by all individual taxpayers. Your annual net rental revenue or losses subject to taxation will be on line 17 on the very first page of the Form 1040. Be aware that as a landlord with rental income and expenses, you’re not allowed to employ the simple Forms 1040A or 1040-EZ.
Schedule E. Schedule E is an addendum of Form 1040. It really has many usages, though the purpose meant for your needs is reporting of rental property profits and costs. The part of Schedule E marked as “Part I” is the single part you need to fill out. There are certain critical tips that you should remember, which include: if reporting on a rental you mutually own with a person, who isn’t your husband or wife, you will only be required to report the expenditures that you accrued along with the income that you earned. Additionally, remember if you rented for only part of the year, or if you were renting a portion of your home, you have to distribute costs concerning rental and non-rental usage. For additional details, check out Tax Deductible Rental Property Expenses, the article set that’s provided in this Guide.
Form 4562. Form 4562 is employed to determine depreciation for your rental property, that you’ll deduct on line 18 of Schedule E. Look at the article called Depreciation Expenses for Rental Property, included with this Guide, for further info.
Partnership/Corporate Ownership
Including a general or limited partnership, or S corporation.
Form 1065/1120-S. When you have a collaboration, you need to use Form 1065, the form a collaboration utilizes to report all of its enterprise activities. Form 1120-S is employed by an S corporation to report company activities. Your annual net rental property revenue or loss are reported on Schedule K, line 2 of Form 1065 or 1120-S (Schedule K is embedded within these documents).
Form 8825. Form 8825 is for partnerships and S corporations, but it works similar to Schedule E. It is basically a lot like Schedule E. Make sure you disclose total sums of all earnings and costs accrued by the partnership or corporation (Later on, they are going to be allotted to each investor or business partner).
Schedule K-1. The net leasing income or losses as a result of each investor or partner is reported by this tax form, in accordance with the rental property ownership interest of that shareholder or partner. Each partner is provided with their own K-1 and will report the elements of that K-1 on their Form 1040, Schedule E, Part II.
Limited Liability Company (LLC) Ownership
You may file as if you are an individual rental property owner since, for income tax uses, a single-member LLC is really a disregarded entity (look above). A multiple-member LLC may choose to be taxed either as a partnership or as an S corporation (look 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.
Posted by Seattle CPAs on May 20, 2013 · Leave a Comment
The IRS claims that home office deductions are no more likely to spur an audit than any other deductions, Still many taxes payers are leery of this deduction. The solution: stick to the rules and you should have nothing to fear.
The key to this deduction is that rental property owners may claim this deduction if they are active, which is to say you must be doing 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.
After you’ve met this requirement you will also have to meet the basic home office deduction thresholds. For starters, you have to use the home office exclusively for your rental business on a regular basis.
On top of these requirements, you must meet at least one of the following expectations:
1. This office space must be the principle location from where you manage your business as a rental property manager.
2. You have no other fixed location where you perform the administrative activities that are required to operate your business.
3. You interact with tenants in this home office space.
4. You use a separate structure on your property for 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 can be written off. There are direct and indirect types. Direct expenses solely benefit the home office area of your home such as cleaning or painting. Indirect expenses benefit the entire home and must be apportioned out between the office space and the rest of your house. Mortgage interest, insurance, property taxes and utilities are examples of indirect expenses. Square footage is the basic means of determining the proportion of the home office in relation to the entire house to come up with a percentage. A 2,000 square foot house 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 if the house is sold.
And you will want to ensure that you are keeping diligent records in case there is an irs audit. You will need to be able to prove that you were entitled to any claimed tax 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 professional communication. And when using your home office to meet customers, it is wise to keep a log to keep track of meetings. You should keep utility bills, mortgage interest statements, insurance premium statements, property tax statements, and other appropriate expense statements.
This is a basic guide to home office deductions. This is not a substitute for the expert counsel of a Seattle Accountant.
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 February 22, 2013 · Leave a Comment
There are a lot of deductible expenses connected to owning a rental property. In this write up we will expand on expenses regarding professional fees, interest, and advertising, these are expenses you may deduct from gross rental income in order to calculate net rental income.
Interest
The primary type of interest you will most likely deduct is interest on the mortgage. If you’re renting the property as its own living unit, you can deduct all of the mortgage interest you paid on Schedule E. Whereas, if you’re renting a room in your house, or if it is a duplex and you are living in the other unit, then you have 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. 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
Ads in a 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 legal representative to pen a rental agreement or initiate legal actions so that you can evict a renter, you could deduct these payments. Also you can deduct fees paid to a tax preparer for the preparation of the Schedule E of your tax return from the previous year. Make 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 commissions or management fees to professional realty groups for overseeing your rental property are deductible as well.
Tax CPA +John Huddleston has written prolifically on accounting and other tax related issues facing 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 11, 2013 · Leave a Comment
Several expenses incurred in preparing a rental property (previous to ultimately letting the rental property) are deductible. So let’s take a look at several.
Note: Startup expenses discussed within this segment of the Landlord’s Tax Guide, are dissimilar from the expenses which qualify as deductible (under section 195 of the Internal Revenue Code.) Under section 195, certain startup expenses (in an active trade or business) are deductible up to $5,000 with a balance amortizable over a fifteen-year time frame. Though, under the section 195 code, rental activity is not included given that rental property is perceived as a passive activity instead of an active business or an active trade. Find a great deal more information on passivity in the Tax Deductible Rental Losses article.
NOTE: “Rental activity” starts right when you make the property available for rent and place it on the market, not when you have actually have a tenant or a renter.
Obtaining a Mortgage Expenses
Abstract fees, recording fees, and mortgage fees (amongst other fees) are capitalized and so become part of your basis in the property. Instead of expensing these fees all at once, you must depreciate those expenses.
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 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 an appointment with a CPA.
Repairs versus Improvements
You must depreciate and capitalize improvements to the property before putting the property on the market. Improvements are those that 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 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 would like to read further.
Tax Accountant +John Huddleston has written prolifically on accounting and tax related issues facing small businesses. He is a grdaute of Washington State University and the University of Washington.
Posted by Seattle CPAs on December 27, 2012 · Leave a Comment
Let’s begin by having a look at the various entity selection types that are available. Each has advantages and disadvantages. As a rule of thumb, you’ll aim to protect your property from unsecured creditors and limit liability. So let’s unroll the list and see what we’ve got here.
When forming an entity, you’ll need to visit SOS.WA.GOV to register.
TIP: Always consult a tax attorney or CPA before establishing an entity and transferring ownership of a rental property. This Guide is just not meant to be an all-in-one solution you should seek the care of a qualified professional.
Individual Ownership
This form of ownership is the more common and the most straight forward method of ownership and occurs when you purchase the rental property in your 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 straightforward, for one it doesn’t require you to file any complicated paperwork or pay any lofty filing fees. The big disadvantage to this kind of ownership is that your creditors are able to force a sale of the rental property if they receive a court judgment against you, or compel you into involuntary bankruptcy.
Legal Entity Ownership
General partnerships, limited liability companies, and corporations are all legal entities. The differences between these 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 property, given that you do not own it. The general partnership is the only type of entity that does not require registration with the Secretary of State. As far as taxes are concerned, the entity type chosen doesn’t matter a tremendous amount because in most cases, rental income “passes through” from the entity and is taxed on a personal tax return (but see the cautionary note under corporations). Cover the article titled Necessary Tax Forms for Reporting Rental Activity, included in this Guide, for more on how rental income is taxed.
General partnership. This form of ownership takes place when two or more persons co-own a for profit business. Now with a general partnership the partners have equal management privileges, but also each partner is personally liable for any incurring debts of the partnership. And thereby a general partnership is most often not preferred.
Limited partnership. This entity is more complex than the general partnership as it requires both one limited partner and one 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 at the same time is without management rights.
Limited liability partnership/company. A limited liability partnership and a limited liability company are quite similar entities, both provide for limited liability to partners/members. This would mean that you will not be personally liable for the debts of the entity, that is unless the debt is caused by your own wrongdoing. This form of ownership is often preferable because of limited liability and additionally there are not as many formalities that require observance than with corporations.
Corporations. This form of ownership delivers limited liability and allows for perpetual existence. Although they also require the maintenance of special formalities so that you can maintain the limited liability status. So under this reasoning that LLPs or LLCs are generally more suiting to your goals. Also worthy of noting is that corporations fall under one of two types: c-corporation or s-corporation. When a corporation is taxed as a c-corporation, it pays tax on rental income, and then you will pay tax (again) when the c-corp pays dividends. And it’s preferable to side-step the double-taxation trap whenever possible.
Tax Accountant +John Huddleston has written extensively on the subjects of taxes and accounting. He is a graduate of the University of Washington’s School of Law, with a Juris Doctorate and a Masters in Tax Law.
