Investment properties and tax write offs

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My 2 cent, minimal experience in rental properties. I am getting the impression that some are new to the idea of being a landlord. Make sure you inspect your property regularly. This is not a “set it and forget it” investment. Renters are not owners and they, in my experience, do not respect YOUR property. They will have other families living with them, illegal dogs, cats, drug paraphernalia, drinking binges, destructive to the property, filthy, parties, you name it. Impressions don’t cut it. My parents worst renters where...........a clean cut looking Baptist preacher and his family. Filthy undisciplined animals. My, my the tales I could tell.

My reason for this is not to scare but to enforce that regular inspection of YOUR property and addressing “problems” immediately, will save you money in the long run. Drive by or stop by and knock on the door and ask how thing are going. You can get a quick peek, without being invasive, on how they are keeping the house and yard. If the yard is a disaster chances are the inside is too. You are not allow to pop in when ever you want. Schedule annual or semi-annual “maintenance inspections” so that you can check out YOUR property. But remember it is THEIR HOME and you have to be careful how you approach THEIR HOME. Put that in you rental agreement that you will schedule walk thru inspection with proper notification. At least you will get the house tidied up once or twice a year. People are, for the most part, lazy and will not respect something that they did not labor for.

I know it sound horrible. You can have 100 good tenants but you always remember the 2 or 3 bad one’s.

 

[Oaktree]

I am selling my rental property in Georgia, I have not lived in the house in the last 5 years, I left on military orders from Georgia to Germany in 1997, what am I looking at as far as taxes?, is there any way to defer some of the taxes? Any info on this would be of great help, Thanks

 

[Gilligan]

I am selling my rental property in Georgia, I have not lived in the house in the last 5 years, I left on military orders from Georgia to Germany in 1997, what am I looking at as far as taxes?, is there any way to defer some of the taxes? Any info on this would be of great help, Thanks

Have you lived in this house at all? I believe if you lived in it at least two years, you can keep $250,000 profit, tax free, each for you and your spouse.

Pyriel & Ocean, does sound right to you?

 

[Oaktree]

No we have not lived there, it has been rented since 1999. I am just trying to find out what part is taxable and can I defer some of it in any way?

 

[Rod]

Basically, when you own an investment property, you will pay a capital gains tax on your resale profits at the time you sell. But, when you sell your personal residence, your gains come to you tax-free up to $250,000 ($500,000 for couples). As long as you've lived in the property for two of the previous five years, you don't have to report this profit to the IRS. What's really cool is you can repeat this process every two years pocketing the profits.


God Bless

 

[Oaktree]

Basically, when you own an investment property, you will pay a capital gains tax on your resale profits at the time you sell. But, when you sell your personal residence, your gains come to you tax-free up to $250,000 ($500,000 for couples). As long as you've lived in the property for two of the previous five years, you don't have to report this profit to the IRS. What's really cool is you can repeat this process every two years pocketing the profits.


God Bless

Thanks Rod,
I had read somewhere that it was possible to roll over into other property or a IRA deferring the tax. But if one must pay the full tax at the time of sale now, I guess that is not the case. Does anyone know of a site where I could learn more?

 

[Gilligan]

Pyriel probably has more experience in this than anyone else on this board. He is TDY right now, he might have some suggestions. An accountant would give you some guidance in tax shelters.

 

[Dogdaddy]

Thanks Rod,
I had read somewhere that it was possible to roll over into other property or a IRA deferring the tax. But if one must pay the full tax at the time of sale now, I guess that is not the case. Does anyone know of a site where I could learn more?

Oaktree:
Look into a "Like Kind Exchange" (IRS Form 1031). Go here for simpler explanation than the IRS provides, then talk to a Tax Advisor:

http://www.wwlaw.com/1031.htm

Dogdaddy

 

[pyriel]

No we have not lived there, it has been rented since 1999. I am just trying to find out what part is taxable and can I defer some of it in any way?

You have to pay tax when you sell the property since this is an investment property. Dogdaddy is right about the 1031 exchange where you can defer payment of taxes if you buy a like kind property. The problem here is that you just deferred paying taxes on it.

Many people who are retiring does it this way, Before they retire, they sell their home. They are not taxed because they lived there more than two years. They then move to their rental property and lived there for two years. After two years, they sell the rental property (now their own home) and they don't get hit with the capital gain tax.

Ok, Ok, Ok.... I lied.... You will still get hit with a capital gain tax due to the usage of depreciation when you had the property as rental. However, You just need to take out the depreciation from the original purchase of the rental property prior to moving in to make it your residence. That variable will be your basis for your capital gain tax. Here is an example, rental house purchase is 100k, rented it for 5 years and depreciated for 5k. You decide to move in to the house and sold it for 125k two years after. 5k/100k=5% You must pay 5% of the 25k profit once you sell the house after living in it for two years... Total $$ that is now going to get hit with tax is 1250. This is alot better than 25k. If you are in the 36% bracket, you will have to pay, 450.

Now, for the IRA issue, you can create a corporation (c or s is up to you). You can then become an employee of that corporation and your salary can be funneled through an IRA. I plan on doing this with all of my rental later so that I can continue to contribute even when I retire from my job (it is also a good way to make profit dissapear). The other way is to put your rental property under an IRA. Very complicated and I have never tried it so I will defer that for someone to explain.

I hope I didn't make this clear as mud...;-) Pyriel

 

[ocean]

Now, for the IRA issue, you can create a corporation (c or s is up to you). You can then become an employee of that corporation and your salary can be funneled through an IRA. I plan on doing this with all of my rental later so that I can continue to contribute even when I retire from my job (it is also a good way to make profit dissapear). The other way is to put your rental property under an IRA. Very complicated and I have never tried it so I will defer that for someone to explain.

I hope I didn't make this clear as mud...;-) Pyriel

pyriel,

I would like to hear more about your thinking of creating a corporation. Are you planning to convert your existing rentals into the corporation owned? How complicate is that? Specically with the mortgage company, would they allow to do it.

I became a landlord last year. When I was trying to do the tax returns this year, I realized that I can't deduct the loss on rental income and depreciation because of my household income. I am thinking about taking my rentals into a form of S Corporation. I will have to do more research this area. But your thought will be appreciated.

Thanks

Ocean

 

[pyriel]

pyriel,
I became a landlord last year. When I was trying to do the tax returns this year, I realized that I can't deduct the loss on rental income and depreciation because of my household income. I am thinking about taking my rentals into a form of S Corporation. I will have to do more research this area. But your thought will be appreciated.
Ocean

I created an S corporation for my apartment and use 1120s tax form (to include Schedule K-1) which becomes an addendum to my 1040 long. Gains or losses is inputted in 1040 at a section INCOME blocked 17. If it is a loss, this should lower down your income that you get from your W2 (those who do their taxes would know what I am talking about). Instead of an S or C corporation, I would advocate creating and LLC. It is almost the same as S corporation. The difference is capital gain tax. When you decide to sell the property later. Corporation gets hit with the highest capital gain tax vs. individual capital gain tax with LLC. For tax purposes, that is the only difference I can find between the two. For deduction purposes is concern, LLC is treated like a corporation. I didn't learn about LLC until later.

I am concern about you not being able to deduct the loss on your rental property and depreciation. By using Schedule C you should be able to use your rental loss and depreciation (and repairs, and property tax, and tax preparation expense, etc. etc. etc). You then take the loss (or gains) at a section INCOME blocked 12. Again this should lower down your income coming from your W2 before you hit the Adjusted Gross Income section.

Hmmm... Am i posting in the right place or this should go to Section under Taxes.
P

 

[ocean]

I am concern about you not being able to deduct the loss on your rental property and depreciation. By using Schedule C you should be able to use your rental loss and depreciation (and repairs, and property tax, and tax preparation expense, etc. etc. etc). You then take the loss (or gains) at a section INCOME blocked 12. Again this should lower down your income coming from your W2 before you hit the Adjusted Gross Income section.

Hmmm... Am i posting in the right place or this should go to Section under Taxes.
P

pyriel,

Thanks for taking the time to explain it. When I was preparing this year tax returns a week ago, the Form that I think I could use for rental income was schedule E for rental profit or loss. And Form 8582 was used for property depreciation. According to the tax publicaton, all rental properties are considered as passive activity. That's why I used these Forms and followed their guidelines on limitation for deduction and that's where I found that I could not deduct any loss because of the Adjusted Gross Income limitation.

You mentioned that Schedule C can be used for loss and depreciaion. I noticed that the title of the Form is "Profit or Loss from Business - sole proprietorship". Am I allowed to use this Form instead of Schedule E even though I did not register as either Corporation or LLC? Your thought would be appreciated.

Ocean

 

[pyriel]

pyriel,

Thanks for taking the time to explain it. When I was preparing this year tax returns a week ago, the Form that I think I could use for rental income was schedule E for rental profit or loss. And Form 8582 was used for property depreciation. According to the tax publicaton, all rental properties are considered as passive activity. That's why I used these Forms and followed their guidelines on limitation for deduction and that's where I found that I could not deduct any loss because of the Adjusted Gross Income limitation.

You mentioned that Schedule C can be used for loss and depreciaion. I noticed that the title of the Form is "Profit or Loss from Business - sole proprietorship". Am I allowed to use this Form instead of Schedule E even though I did not register as either Corporation or LLC? Your thought would be appreciated.

Ocean

Schedule E vs. Schedule C, that is the question... It is really a gray area on which one you would want to use. For Schedule E, IRS says, "To report real estate and royalty income (or loss) that is not subject to self-employment taxes. Schedule C "to report income or loss from a business you operated or a profession you practiced as a sole proprietor." Schedule E, Part I also state, "If you are in the business of renting personal property,use Schedule C or C-EZ." Which one should we follow?

My answer is use the form that will allow you the most deductions. Why? Because it is a gray area for those who are into real estate rental taking in passive income. Rental properties (not under LLC, S or C Corp) are considered sole proprietorship under the owner. Why is it called sole proprietorship? It is because there is one owner (you). I assume that you have a business license and I also assume that LLC, S or C Corp is not written on it. When you receive a business license to run your rental unit it becomes a business which now allows you to use Schedule C.

However, since rental income is a "rental real estate," then you should be able to use Schedule E as well. Why? Because this is really a proper form rental real estate. In fact, in Part I of Schedule E, you must list your rental property one at a time and produce the income of loss from them.

Here is the bottom line, many tax preparers will not know the difference between the two. IRS also wouldn't care as much as long as you are reporting your income or losses correctly. Both forms should give you the same amount of income or losses (and depreciation, and expenses) so I wouldn't worry about it... If you are not trying to cheat the government by evading taxes, the worst they can tell you is to redo your tax and switch one form to another form. 10 out of 10, that doesn't happen...
Pyriel

 

[ocean]

Schedule E vs. Schedule C, that is the question... Schedule E, Part I also state, "If you are in the business of renting personal property,use Schedule C or C-EZ." Which one should we follow?

My answer is use the form that will allow you the most deductions. Pyriel

Pyriel,

You are the man! Your answer here probably will give me about $10K deduction on Federal tax. That transforms into about $3K saving of the federal tax that I will pay and it is legal. State tax would not make the difference because there is no deduction for business loss in NJ.

I took a quick glance on Schedule C, I found these Forms contain many similar reporting area. Only difference is that it did not indicate that there is a separate area for filing more than one property. I have 3 rental properties where 2 that I acquired last year and 1 that I converted to rental from my vacation home. I think I may need to add all the incomes and expenses from these properties in order to use Schedule C. If it is workable, then I will use Schedule C and I will investigate some more on these Forms.

This year I will file an extension on my returns so I will have another 4 months to prepare it.

Pyriel, I really appreciate the information that you'd given here. Aside from your TSP investment, I know you are on your path to your financial freedom in the real estate investment.

Ocean

 

[ocean]

Pyriel,

After my little research, I found that for non registered business, the profit or loss will need to use Schedule E which I belong to this category. It means that the deduction of the loss for current year is based on the threshold of AGI and it can be carried over for future years. For now, I think I will use Schedule E on the safe side and write-off my loss when my household incomes reduce when both my wife and myself retire in about 8 years.

Thanks,
Ocean

 

[pyriel]

Pyriel,

After my little research, I found that for non registered business, the profit or loss will need to use Schedule E which I belong to this category. It means that the deduction of the loss for current year is based on the threshold of AGI and it can be carried over for future years. For now, I think I will use Schedule E on the safe side and write-off my loss when my household incomes reduce when both my wife and myself retire in about 8 years.

Thanks,
Ocean

What is a non registered business? No business license? Are they paying on a cash basis? Hmmmm... I think that you are on the right track.... PM me for your answer and lets see what you can I can come up with. Something comes to mind right away but would not want to post it here...;-)