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.
One of the most frequent questions from taxpayers is regarding rental property depreciation. Should you do it or no? Well, the IRS says it doesn’t matter because of little rule called allowed versus allowable. I painted the inside and out. Do I depreciate that? I put carpet in the whole place. Do I expense that? I put carpet in just one room. Now what? Deducting expenses and capitalizing improvements must be handled properly. Let us help! For now, read our Repairs Versus Improvements KB article.
Rental Property Consultants
The principals at the Watson CPA Group 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, single family or multi-unit, own them personally, in a self directed IRA or in an LLC with your partners, we have the practical experience to accurately prepare your rental property tax returns. More importantly, we have the expertise to help you plan for the future!
Other questions come up, such as moving back into your rental. How do you handle rental depreciation recapture? Should I put my rentals into an LLC? What about Hold Harmless Agreements with my tenants? How is the current gain on personal residence sale of $250,000 and $500,000 handled with part years being a rental? Common questions- but each answer must be customized to your unique situation.
Considering a Section 1031 exchange to defer capital gains? Also known as like-kind exchanges. This can be a great plan, but needs guidance before, during and after. There are some tricks of trade too like increasing land allocation upon sale to eat into some of the recaptured depreciation since land is not depreciated but goes up in value. Location location location.
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 fee range of $400 to $600 for most rental property owners who are organized and use our simple, customized online submit forms. Our fee always includes your rental depreciation schedules, state tax return and eFiling.
The Watson CPA Group are tax and business consultants, not just number crunchers. And owning and operating a rental property is a business, and should be viewed as such. Anyone can balance a checkbook. Anyone can put the right number in the right blanks. But we take a consultative approach to your rental property tax preparation. You can always find someone to do it for less- of course. However consider the solid back-end support that you will get with the Watson CPA Group which other tax preparation companies might not provide. Read more about our Value Proposition here.
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. So, if you have garden variety W2 job working 2000 hours a year, you need to spend 2001 hours in real estate activities. Wait! There’s more. Second, your hours worked in the real estate activity must be more than 750 hours. Steep thresholds.
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).
Realtors and agents beware! Just because you spend 3,000 hours hauling around buyers doesn’t mean you are a slam dunk for the real estate professional designation. Real estate agent DOES NOT automatically qualify you. The material participation rules must be met, and the 750 hours dedicated to your rental activity is outside your work as a real estate agent, realtor, broker, etc.
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 properties can offer excellent retirement and cash flow options, but the tax planning needs to be done ahead of time and not later. We look forward to working with you!
The Watson CPA Group (team profile)