|  Before
you take the plunge and purchase a beach condo to use for rental property because
your neighbor talks about the "great tax write-off," a great deal of consideration
should be given to the tax implications (as well as emotional implications) of
owning real estate other than your personal residence.
Rental
income (amounts you receive for the use or occupation of property you own) must
be included in your gross income in the year you actually or constructively receive
the income. You constructively receive income when it is made available to you.
This would include advance rent or payment to cancel a lease. If you receive property
or services, instead of money, as rent, include the fair market value of the property
or services in your rental income. If a rental agreement gives the tenant the
right to purchase your rental property, the payments you receive under the rental
agreement are generally rental income. The payments you receive for the period
after the sale are part of the selling price. Rental
expenses paid in conjunction with your rental income are generally deductible
in the year you pay them. You may deduct costs that are ordinary and necessary
in the operation of your property. These expenses may include, but are not limited
to, management fees, maintenance, repairs, insurance, interest, taxes, utilities,
pest control, travel and association fees. Depreciation
on your rental property is also an allowable deduction from rental income. You
may begin to depreciate your rental property when the property becomes available
and ready for rent. The cost of your residential real estate is depreciated (or
recovered) over a period of 27.5 years. Factors to determine how much depreciation
you can deduct are: 1) your cost or basis in the property and 2) improvements
that increase the value or prolong the life of the property. The land associated
with the property is not depreciable. Other types of property considered depreciable
may include furniture and fixtures, computer equipment, carpet, shrubbery, fences,
roads, and structural improvements or additions. Each class of property has a
different recovery basis. Rental
real estate activities are generally considered passive activities and, if you
incur a loss, the loss may be limited to income from other passive activities.
However, if your rental losses are less than $25,000 ($12,500 for married filing
separately), the passive activity limits probably do not apply if you actively
participated in the real estate activity, unless your modified adjusted gross
income is $150,000, or more. The good news is that if you are not allowed the
losses on your current year tax return, the losses are carried forward (indefinitely,
if need be) to offset future passive income. The passive loss carry forward can
be completely captured in the year the real estate is disposed of or sold. Rental
income and expenses are on Schedule E (Part 1) of your 1040. On page 1, line 20,
enter the depreciation that is allowed. You must also complete and attach Form
4562 to report the depreciation you are claiming.
IRS
Publication 527 may be printed from the IRS web site (www.irs.gov)
or The Henssler Financial Group can assist you with further information on reporting
your rental income and expenses. Please contact us at 770-428-4025. |
