Rental Real Estate Deductions

Transcription

1 Rental Real Estate Deductions 15 th Edition Stephen Fishman, J.D.

2 Chapter 1 Tax Deduction Basics for Landlords... 1 Learning Objectives... 1 Introduction... 1 How Landlords Are Taxed... 1 Income Taxes on Rental Income... 1 Income Taxes When You Sell Your Property... 2 Social Security and Medicare Taxes... 2 Net Investment Income Tax... 3 Property Taxes... 3 What Is Rental Income?... 3 Other Rental Income... 3 How Income Tax Deductions Work... 4 What Can You Deduct?... 5 Pass-Through Tax Deduction... 6 How Your Tax Status Affects Your Deductions... 6 How Property Ownership Affects Taxes... 6 Individual Ownership... 7 Ownership Through a Business Entity Review Questions Review Answers Chapter 2 Landlord Tax Classifications Learning Objectives Introduction The Landlord Tax Categories Business Owner Versus Investor Are You a Business Owner or an Investor? The Importance of Good Records Tax Consequences Are You Profit Motivated? What Is a Not-for-Profit Activity? Tax Consequences of Not-for-Profit Rentals How to Show Your Profit Motive Review Questions Review Answers Chapter 3 Deducting Your Operating Expenses Learning Objectives Introduction Requirements for Deducting Operating Expenses Ordinary and Necessary Current Expense Business-Related Reasonable in Amount Operating Expenses That Are Not Deductible Review Questions Review Answers Chapter 4 Repairs Learning Objectives Introduction IRS Rules: Repair Versus Improvement Three Safe Harbors Safe Harbor for Small Taxpayers (SHST) Routine Maintenance Safe Harbor... 39

3 De Minimis Safe Harbor Repair Versus Improvement Analysis Under the Regulations Defining the Unit of Property (UOP) What is an Improvement? Other Issues under the Repair Regulations How IRS Repair Regulations Affect Prior Years How to Deduct Repairs and Maintenance Making Tenants Pay for Repairs Repairs Paid for or Performed by Tenants Properly Document Repairs Do Preventive Maintenance Delay Big Repair Expenses Review Questions Review Answers Chapter 5 Depreciation Basics Learning Objectives Introduction Depreciation: The Landlord s Best Tax Break Understanding the Basics What Property Can Be Depreciated? How Depreciation Works Taking Separate Deductions How to Depreciate Buildings What Is a Building? When a Building Is Placed in Service Determining a Building s Basis The Depreciation Period How Much You Depreciate Each Year Depreciating Additions and Improvements Building Components That Cost $2,500 or Less Depreciating Land Improvements Changes to Land Structures Other Than Buildings Depreciation Methods Determining Cost of Land Improvements Deducting Personal Property What Is Personal Property? How to Deduct or Depreciate Personal Property Bonus Depreciation De Minimis Safe Harbor Materials and Supplies Deduction Section 179 Expensing What Property Can Be Deducted Restrictions on Using Section Regular Depreciation When Is Personal Property Placed in Service? Determining the Basis of Personal Property Depreciation Period First-Year Depreciation Depreciation Methods Listed Property When You Sell Your Property Adjusted Basis Effect of Adjusted Basis When You Sell Like-Kind Exchanges: Deferring Taxes on Rental Property The Home Sale Exclusion Avoiding Taxes When You Sell Your Rental ii

4 Tax Reporting and Record Keeping for Depreciation Review Questions Review Answers Chapter 6 Maximizing Your Depreciation Deductions Learning Objectives Introduction Determining the Value of Your Land and Buildings There Is No One Way to Determine Land and Building Values Figuring Your Improvement Ratio Property Tax Bill Replacement Cost Buyer-Seller Valuation Comparable Land Sales Cost Segregation Problems With Cost Segregation Time for Cost Segregation Cost Segregation Studies Identifying Personal Property and Land Improvements Cost Segregation Example Review Questions Review Answers Chapter 7 The Pass-Through Tax Deduction Learning Objectives Introduction Your Rental Activity Must Be a Business You Must Have a Pass-Through Business You Must Have Qualified Business Income Rental Losses Reduce or Eliminate the Pass-Through Deduction Landlords With Multiple Businesses You Must Have Taxable Income Calculating Your Pass-Through Deduction Taxable Income Below $157,500 ($315,000 for Marrieds) Taxable Income Above $207,500 ($415,000 for Marrieds) Taxable Income $157,500 to $207,500 ($315,000 to $415,000 Marrieds) Taking the Pass-Through Deduction Strategies to Maximize the Pass-Through Deduction Review Questions Review Answers Chapter 8 Interest Learning Objectives Introduction Interest Landlords Can (and Can t) Deduct Mortgage Interest Interest, Not Principal, Is Deductible Expenses to Obtain a Mortgage Private Mortgage Insurance Mortgage Refinancing Mixed-Use Properties Other Interest Expenses Credit Cards and Loans Car Loans Home Offices Home Equity Loans Points and Prepaid Interest Interest on Construction Loans iii

5 Loans With Low or No Interest Loans on Rental Property Used for Nonrental Purposes Limitation on Interest Deductions by Landlords Earning $25 Million or More Review Questions Review Answers Chapter 9 Start-Up Expenses Learning Objectives Introduction What Are Start-Up Expenses? Determining Your Business Start Date Rental Business Begins When You Offer Property for Rent Expanding an Existing Rental Business How to Deduct Start-Up Expenses Expenses You Can Deduct Costs That Are Not Start-Up Expenses If Your Business Doesn t Last 15 Years If Your Business Never Begins Review Questions Review Answers Chapter 10 The Home Office Deduction Learning Objectives Introduction Qualifying for the Home Office Deduction Threshold Requirements Additional Requirements Calculating the Home Office Deduction How Much of Your Home Is Used for Your Rental Business? What Expenses Can You Deduct? Simplified Home Office Deduction Method IRS Reporting Requirements Deducting an Outside Office Renting an Office Using an Office in Your Rental Building Buying a Separate Office Building Review Questions Review Answers Chapter 11 Car and Local Transportation Expenses Learning Objectives Introduction Deductible Local Transportation Expenses Travel Must Be for Rental Activities Driving from and to Home The Standard Mileage Rate How the Standard Mileage Rate Works Requirements to Use the Standard Mileage Rate The Actual Expense Method How the Actual Expense Method Works Record-Keeping Requirements Vehicle Depreciation Deductions Leasing a Car Other Local Transportation Expenses Reporting Transportation Expenses on Your Tax Return Review Questions Review Answers iv

6 Chapter 12 Travel Expenses Learning Objectives Introduction What Are Travel Expenses? Where Is Your Tax Home? Your Trip Must Be for Rental Business Deductible Travel Expenses Traveling First Class or Steerage Taking People With You How Much You Can Deduct Calculating Time Spent on Rental Activities % Limit on Meal Expenses Review Questions Review Answers Chapter 13 Hiring Help Learning Objectives Introduction Deducting Payments to Workers Operating Expenses Start-Up Expenses Depreciation Expenses Employees Versus Independent Contractors Tests to Determine Workers Tax Status Common Classifications for Workers Tax Rules When Hiring Independent Contractors Threshold for IC Income Reporting Obtaining Taxpayer Identification Numbers Filing IRS Form 1099-MISC Reporting Requirements Don t Apply to Corporations New Hire Reporting Requirements for ICs Paying Independent Contractors Expenses Tax Rules for Employees State Payroll Taxes Hiring Your Family Employing Your Children Employing Your Spouse Rules to Follow When Employing Your Family Hiring a Resident Manager No Payroll Taxes for Free Lodging Review Questions Review Answers Chapter 14 Casualty and Theft Losses Learning Objectives Introduction What Is a Casualty? External Force Required Theft or Vandalism Calculating a Casualty Loss Deduction Insurance Property a Total Loss Property a Partial Loss Deducting Separate Components Effect of Casualty Losses on Basis Disaster Area Losses Repair and Replacement Costs for Casualty Losses v

7 Tax Reporting and Record Keeping for Casualty Losses Review Questions Review Answers Chapter 15 Additional Deductions Learning Objectives Introduction Dues and Subscriptions Education Expenses Before You Are in Business Traveling for Education Gifts Insurance for Your Rental Activity Homeowners Insurance for Your Home Office Car Insurance Prepaying Your Insurance Premiums Legal and Professional Services Buying Long-Term Property Management Fees Starting a Business Accounting Fees Meals and Entertainment Taxes Real Property Taxes Employment Taxes Tax Break for Accessibility Changes Unpaid Rent Review Questions Review Answers Chapter 16 Deducting Rental Losses Learning Objectives Introduction What Are Rental Losses? Overview of the Passive Loss Rules What Are the PAL Rules For? How the PAL Rules Work The $25,000 Offset Requirements Determining Your Offset Deduction The Real Estate Professional Exemption Real Estate Professional Test Materially Participate in Rental Activity Applying the Test What Happens If You Qualify for the Exemption? The Real Estate Professional Exemption Is Not Optional Record Keeping for the Real Estate Professional Exemption Deducting Suspended Passive Losses You Must Have Passive Income The $25,000 Offset The Real Estate Professional Exemption Profits from Sale of Property Tax Reporting for Passive Rental Losses Strategies for Dealing With the Passive Loss Rules Lower Your Rental Expenses Generate More Passive Income $250,000/$500,000 Annual Loss Limit At-Risk Rules How to Deduct Rental Losses vi

8 Calculating Your Net Operating Loss Review Questions Review Answers Chapter 17 Record Keeping and Accounting Learning Objectives Introduction What Records Do You Need? Paper Versus Electronic Records Create Your Own Spreadsheet Software Programs A Simple Record-Keeping System An Easy Filing System Separate Checkbook and Credit Cards Dealing With Receipts, Canceled Checks, and Other Supporting Documents Expense Journal Rental Income Journal Asset Records Records Required for Local Travel Records Required for Long-Distance Travel, Meals, and Gifts How Long to Keep Records Accounting Methods Review Questions Review Answers Chapter 18 All About Schedule E Learning Objectives Introduction Who Must File Schedule E? Filling Out Schedule E Filing IRS Forms 1099 (Lines A and B) Property Description (Line 1) Dual Use Properties (Line 2) Qualified Joint Venture (Line 2) Rental Income (Line 3) Royalties Received (Line 4) Expenses (Lines 5-20) Rental Summary (Lines 21 26) Review Questions Review Answers Chapter 19 The Net Investment Income Tax Learning Objectives Introduction How the NII Tax Works What Is the NII Tax? Who Is Subject to the NII Tax? Amount of the Tax Real Estate Professional Exemption from the NII Tax Real Estate Professional Material Participation in Rental Activity Rental Activity a Business Planning to Avoid the NII Tax Review Questions Review Answers Glossary Index vii