Tax Tips For Rental Property

In some cases, they may be. Rental losses are considered "passive" losses for taxpayers. This applies to every individual except one whose "trade or business" is in the real estate area. Most taxpayers can take at least the first $25,000 of the losses from rental property, provided they do not exceed certain levels of income where phase out rules would apply.

What happens to losses I cannot use in the current year?

These losses are suspended and carried over indefinitely until they can be used.

What if I die before I am able to use these suspended losses?

The value of your property to your heirs will be "stepped up" to fair market value (how you old title and whether you are in a community property state can dictate how much of the property would receive a "stepped up" adjustment). Your suspended losses are reduced to the extent of any "stepped up" adjustment that is made. This is done on a property by property basis. Any remaining suspended losses after this adjustment can be used on the final Form 1040 for the individual. They can be used to offset any type of income. Suspended losses do not transfer to the state or the heirs.

How much of last month's rent and security deposits must be declared as income in the year I collect them from the new tenants?

Any advance rent (i.e. last month's rent) is always included as income in the year you receive it regardless of either the period the rent covers or the method of accounting used. A security deposit, provided it is refundable, is not counted as income until you keep all or a part of it due to a tenant's failure to follow the terms of the lease.

Can I deduct expenses on my rental house such as painting and adding a deck?

Repairs, which keep your property in good condition, are fully deductible. Painting is usually considered a repair. Improvements, however, which add value to your property, prolong its useful life or adapt it to new uses, are considered capital expenditures and must be depreciated. This would apply to a new deck. In either case, you can never take any deduction for the value of your own labor.

Over what period must I depreciate items such as a washer/dryer, refrigerator, and furniture that I purchase for my rental house?

Under the Modified Accelerated Cost Recovery System (MACRS), these items of personal property are classified as seven-year property.

I bought a rental property for $150,000 and have taken depreciation deductions of $22,000. If I sell the property for $175,000, on how much gain will I have to pay tax?

You would have a gain of $47,000. This is based on the original cost of $150,000, less depreciation of $22,000, leaving an adjusted basis of $128,000. Selling the property for $175,000 would leave a gain of $47,000. This gain would be normally broken down as $22,000 of 1250 gain (subject to different tax rates) and $25,000 of capital gain. Please note you can reduce this gain by any expenses of sale.

Can I turn my personal residence into rental property?

Yes, but you may have to pay tax on it when you sell, if you fall outside of the rules for occupancy as a principal residence. Under the new capital gains rules and new rules for the sale of personal residence, you might be able to exclude the gain on the sale of the property. You are allowed to exclude $500,000 for a joint return and $250,000 for a single filer on the sale of a principal residence. There is no such exclusion for rental property.

Will my gain be taxed at capital gains rates?

For assets held more than one year, gains will be taxed as capital gains with a maximum rate of 20%. Depreciation is generally recaptured and taxed at a different rate.

Is it possible to rent your own home and not pay tax on the income?

If you rent your principal residence or vacation home for less than 15 days during the year, you do not report the rent as income. However, you would not be able to deduct any expenses incurred in operating the home while it was rented. The mortgage interest and taxes would stay as deductible under your itemized deduction classification.

Can I defer tax when selling my rental property?

Yes, if you exchange your property for another property through the proper channels. This is known as a Section 1031 tax deferred exchange. You can also sell your property on the installment method and spread the gain over the life of the loan (except for depreciation). Special rules apply to both types of sales, so consulting a professional is advisable before you enter into any transaction.

How will tax changes affect my rental properties?

The rules covering rental property change constantly through new legislation, IRS regulations, and court cases. You should always consult with a tax professional before buying, selling, trading, or making any changes to your rental property.

C. David Pitzer, CPA, PC
118 Two Mile Pike
Goodlettsville, TN 37072
(615) 851-2727
Fax: (615) 851-8711

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