Real Estate Rentals, June 2019

With Tax Reform and all the other changes in the tax law, it is about time to do a general review of the tax rules for rental property owners. This article will get into the basics and the next WealthWISe will go into more complex issues.

Real estate rental properties can be a satisfying way to build retirement income and a fine tax shelter. However, there are tax traps. For example, deductions can be delayed by “passive loss rules.” Another surprise: When you sell a property, you can pay taxes on “phantom gain” even though you receive little cash. So get good advice.

Operating Costs

The IRS Schedule E is where you report income and deductions for a rental property. You can deduct all “ordinary and necessary expenses.” Get a copy of Schedule E from and keep track of the deductions listed on it. I try to give my clients checklists to identify these deductions. For more information, read more.

Typical deductions are listed on the Schedule E and include: ♦ advertising, ♦ local auto travel, ♦ cleaning and maintenance, ♦ commissions, ♦ premises and mortgage insurance ♦ mortgage interest, ♦ legal and professional fees, ♦ management fees, ♦repairs, ♦ supplies, ♦ real estate taxes, ♦ insurance, ♦legal and professional fees, ♦ management fees, ♦ amortization of points and loan closing costs. There are many other deductions. I try to give my clients checklists.

I can tell you how to maximize these deductions and guide you to many other deductions depending on the particular property, such as association fees, security monitoring, and transportation costs. I use checklists of rental deductions, to make sure that nothing is missed. Be sure to track mileage to visit the properties for business purposes. Be alert for any deductions that help your rental business: including mortgage insurance premiums, refunds, the home office where you manage the properties, business gifts and use of phones and computers to run the business. You can prepay a few months of these in a pinch.

Other deductions include ♦Airbnb fees, ♦ state and local government occupancy taxes, ♦ pest control, ♦ cable television, ♦ depreciation of the building and contents, ♦ business education and travel to get it,
My advice: be aware of the cost of running your management office, including a ♦ home office, ♦ furniture, and equipment, ♦ postage ♦ internet service, bank charges ♦ and so on. Year-end planning may include prepaying a few months of these.

My advice: keep track of purchased tangible personal property Under Tax Reform, for the first time, the §179 deduction is available to write off furniture and equipment purchased for a rental property that are not part of the building.
My Advice: Identify all purchases that do not become a part of the building and keep records.
My advice: Beware of large repair deductions. These are a favorite target of IRS Auditors because large repairs often constitute capital expenditures.
Capital expenditures are costs of assets with a useful life of more than one year, such as the building, a new roof or air conditioning unit.
The basis of your rental property includes certain closing costs, plus the cost of improvements. The “adjusted basis” of the property is basis reduced by prior depreciation deductions. Basis is used for calculating the depreciation deduction and gain or loss on the sale of an asset.
The depreciation deduction is pro rata deduction of the basis of an asset over its useful life. Added to your operating costs, depreciation allows you to deduct more than you spend each year. For example, the IRS specifies a 27.5 year useful life for residential rental property, so you can deduct 3.636% per year. Nonresidential property has a 39 year life – 2.564% per year. Land is not depreciated.
Some “components” of your rental property, such as appliances or carpets, may qualify for a much quicker write off than a building my advice: keep track of tangible personal property purchased for your rental. Under Tax Reform, for the first time, the §179 deduction is available to write off furniture and equipment purchased for a rental property that are not part of the building. The §179 deduction is limited to the profit from the property, but such assets may nonetheless be depreciated separately over 7 years.
My Advice: Identify all purchases that do not become a part of the building and keep records.
If you sell a property, you will have taxable gain if its selling price exceeds its adjusted basis. If you hold a property for 12 months or more, the gain on the sale is long-term capital gain (LTCG), which qualifies for a much lower tax rate. High income taxpayers may pay an additional 3.8% tax on such gain.
“Phantom gain.” occurs where a property’s adjusted basis has been decreased by depreciation or where you refinanced and took out cash.

About Wis Laughlin

I help clients with tax preparation and IRS representation, estate planning, and complex contracts, including LLC's. As a former IRS tax attorney in their National Office. picked Wis in 2017 and several prior years as one of the Top Tax and Estate Lawyers in Tennessee. I am your advocate, not your accountant. I don't tell you what you can't do. I show you how to do it.
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