Rental properties can be great investments and offer ways to shelter your taxable income. However, there are several tax related issues during the purchase, management and sale of your rental property. The proper handling, coordination and reporting of taxable events such as closing costs, repairs versus improvements, depreciation, seemingly innocent HOA dues and mileage can improve your tax consequence. While incorrect tax reporting can start the slow brewing of future problems.
Please see our Rental Property FAQs to review several tax issues including rental deductions and rental depreciation.
Real Estate Professional IRS Election
To be a real estate professional, an individual must spend the majority of his or her time in real property businesses which include development or redevelopment, construction or reconstruction, acquisition or conversion, rental, management or operation, leasing and / or brokerage.
In addition, more than half of the personal services performed in all businesses during the year must be performed in real estate businesses. Second, your hours worked in the real estate activity must be more than 750 hours.
If you own multiple rental properties each will be considered a separate entity and you must satisfy the above requirements on each property independently unless an election is made to treat all those interests as a single activity. This election is simply a statement that is attached to your tax return. And under Revenue Procedure 2010-13, you can make the election retroactively (typically requires amending a tax return just for the election).
Once you qualify as a real estate professional, you must materially participate in the operation of your rental property business. This is where it gets tricky, and this is where most rental property owners get into trouble. If you cannot prove material participation in your rental activities, you will be subjected to passive loss limitations (currently $25,000).
For more information directly related to the IRS definition of real estate professional and the tests for material participation please read our article at-
This is a hot topic for the IRS so stay out of trouble.. give us a call!
Rental Property Experts
We have been rental property owners since 1996, and can offer comprehensive tax advice coupled with real-life rental property business consultation. Whether you have one rental or several, own them personally, in a 401k / IRA or in an LLC with your partners, we have the practical experience to accurately prepare your rental property tax returns.
Many tax preparation companies charge you a basic rate, and then add on additional charges for eFiling, joint returns, rental properties, capital gains, small businesses, etc. And once you’re committed and find out the total fee, it’s too late. We offer a flat fee of $150 for most rental property owners (others are $225). Our fee always includes your depreciation schedules, state tax return and eFiling.
Please review our Fee Structure for more information.
The Watson CPA Group is not just tax preparers or number crunchers- we are tax consultants, and our firm will take you through the cycles of your personal and business lives. Many accountants are only compliance oriented- and while IRS compliance is critical, being proactive is equally important
And we are a resource that is always available throughout the year. Have a question? Need advice? Received a notice from the IRS just before Happy Hour on a Friday? You can contact us anytime, day or night.
Moreover, our goal is to always prepare a comprehensive and accurate tax return but equally important is your understanding of how a tax return 'works'- to the extent necessary, we want you to be comfortable with your tax consequences so together we can successfully plan for your future. We are rental property minded people who are also small business owners- we can speak your language, not just in a theoretical sense but in a practical down to earth manner.