The guidelines associated with the personal and leasing utilization of premises are included in this article in the Landlord’s Tax Guide. This may be either because you are leasing out a space in the same property which you are living in, or you have got a vacation residence that you might privately employ a few weeks out of the calendar year and rent the remainder of the time. This information will not apply to you at all if you never use your rental property for personal use. However, if you do, you will want to keep reading.
Property rented for less than fifteen days. Any time you leased your property for less than fifteen days total in the past year, you don’t have to file any of your rental revenue. If this is the scenario, then the real estate property is going to be considered personal for taxation considerations, and on Schedule A of Form 1040, it is possible to deduct any of the property associated expenditures as personal.
Employing Your Holiday Home as a Part Time Rental
Personal use test. It’s important to work with some type of numeric formula to determine the total number of days during which the rental property was used for personal use. That is the personal use test. How you deduct your rental expenses is going to largely be determined by whether or not the personal use test is satisfied. Finding out the actual quantity of days in the past year in which the real estate property was leased out at fair market value is the initial step in calculating the personal use test. The next step is to multiply that number of days by ten percent. We will label the outcome the “total days rented” or “TDR” for short. The next stage will be to figure out how many days the rental property was employed for private use. We can label this “personal use days” or “PUD” abbreviated. Look at the table below for a vision of the personal use test.
NOTE: “Personal use” consists of use by you, any other owners of the home and property, plus the families of all individuals who own the property, unless of course your family member is paying out rent at fair market value.
If TDR is…
and PUD is…
then the personal use test is…
less than TDR
less than 14
more than TDR
more than 14
If test is satisfied. If the personal use test is satisfied, you will deduct your rental expenses only to the extent of the rental income. A net rental loss will not be attainable, but when there are any additional expenditures you do not write off this year, they can be moved forward to later years, provided that there is an adequate sum of rental earnings in the tax year in which you claim them.
If test is not satisfied. Your own leasing costs will never be restricted by the rental income if the personal use test is not satisfied. You could deduct your rental costs and also have a net rental loss. There could be a few passive activity rules, however, which may still restrict the rental loss tax deduction.
Computing all of your rental expenditures. A number of expenses should be allocated between leasing and personal application. These include expenditures that will have already been charged no matter the use, such as real estate taxes and mortgage interest. Find out the whole number of personal use days. Then, you will need to determine the total quantity of TDR. After that, divide rental days by the sum of PUD and rental days. The end result is the rental percentage. Finally, you have to multiply the total cost of your expenses by the leasing percentage that you have established, and then the result will be the rental deductible part.
Leasing a Section of Your House
You need to expressly allot all your costs in between private usage and leasing use if you rent out a part of your own personal home. The IRS allows a little versatility with the method you employ; just make sure it’s consistent from year to year. Some people choose the option of taking the number of rooms within their residence along with the number of rooms within the home, and divide them. Dividing the rented sq . ft . by the residence’s total sq . ft . is another option that lots of people go for. You’ll end up with rental costs and personal costs. Those allotted to the leasing income can be deducted as such, and you can use Schedule A of Form 1040 to deduct what’s left.
Lynnwood CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. He is the owner of his own small business, Huddleston Tax CPAs. He is a graduate of Washington State University and the University of Washington School of Law.
You must determine that all of the services and fees are set up adequately and thoroughly recorded for the purposes of taxation conformity, if you have chosen to lease property for profit. Let us talk about some of these expenses.
Similar to most premiums, it’s usually prepaid upfront for a specified time period. One example here might be: you purchased insurance protection for this particular rental property on March 2012 for $1200. April 2012 to March 31, 2013 would be the coverage duration of this plan. Because the protection time period will surpass the present tax year, you need to identify the premiums applicable to the present tax year only and then bring forward the rest for the upcoming filing year. With this example your allowable premium tax deduction could be $900 (9 months April to Dec 2012) or $100 per month of qualified rental property utilization.
Personal and business customers can often get a discount price if their insurance company is willing to combine their premium products. Only the business rental property pertinent part will be deductible. The private and non-business related utilization may be allowable with your individual income tax return. You should include Title insurance in the Cost Basis of the rental property, as it’s not an allowable expenditure.
Cleaning and Maintenance
If it is related to regular cleanliness and upkeep of commonly used areas, then day-to-day upkeep of the property will be an authorized expense. These expenditures are also confined to the days that are tax deductible rental days and not personal use days. Many rental property owners have got contracts with local professional services to maintain the property on a continuous basis to ensure it’s in working and useable order. These services will give you a range of services including basic upkeep, dusting, window washing, and cleaning appliances. Structural repairs and alterations aren’t deductible, so should be listed in the rental property’s Cost Basis.
Once in a while, there might be some kind of necessity to repair a home appliance, do a bit of painting, or some undertaking which doesn’t require a significant reconstruction of the property framework. These types of costs that are common and important are allowable depending on the leasing period of time.
You have to realize that these expenditures that are typically allowable against the earnings of the rental property, you cannot include the times that are regarded as personal times of use. The only expenses that are deductible are those that are associated with the authorized rental period, specifically.
- On the IRS’s webpage, you’ll find numerous documents you’ll need. Consult IRS Publication 527 for more information.
Seattle CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.
If your travel expenses related to your rental property are considered ordinary and necessary, they may be deductible. Maintenance, rent payment collection and fulfillment of management duties are all deductible reasons for travel. Commuting to work is considered a personal cost and therefore is not deductible. Additionally, you may not deduct travel expenses related to making improvements on your property. That’s generally recovered using a cost recovery system like depreciation.
All deductible travel expenses may be deducted with this method. IRS Publication 463, Chapter 5 specifies the way in which these types of costs need to be recorded and supported with invoices and receipts. Certain software applications can be obtained via iPod, Quick Books, Mint, and so on to help you back up your files; nevertheless you must continue to keep a touchable record to support any tax deductions. You will report all your deductions with either a Schedule C or Schedule E. If you own more than one property, be sure to allocate costs directly to the property where they were incurred.
Under this method, you will deduct your actual mileage traveled. For example, if you drove 1200 miles during 2012, you’ll apply the existing standard mileage rate of $0.55.5 per mile and deduct this total.
You have to have documentation to support all use of community transport including motor vehicle rentals, metro bus services, and Zip Cars. It is advisable to relate all local travel expenses to a business account tied directly to your rental property business.
Quick Note: You can obtain the different documents outlined in this information on the IRS’s webpage.Reference IRS Publication 527 to find out more.
Mercer Island CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.
As a property manager, to completely account for and report your own leasing revenue to the Revenue Service, you need many IRS tax forms that will be outlined in this article. As detailed in the next paragraphs, the tax documents required will be different, in accordance with the kind of professional company which is the owner of the property (individual, partnership, corporation, or LLC). Read the page titled Best Rental Property Ownership, included inside this Guide, to get more information on legal entity ownership.
Quick Note: You will find each of the forms outlined in the following paragraphs on the IRS’s homepage: http://www.irs.gov/Forms-&-Pubs. All the needed forms will undoubtedly be provided in any tax preparation programs, if you are using one of them.
This includes mutual rental property ownership with a wife or husband, tenancy in common, or shared tenancy with legal rights of survivorship.
Form 1040. All independent people have got to use Form 1040, and this is the place you have to start. Found on line 17 of the first page of Form 1040 is the total rental property revenue or financial loss, subject to tax. You won’t be allowed to take advantage of the shortened Forms 1040A or 1040-EZ, as a good landlord with rental activity.
Schedule E. The addendum to Form 1040 you need to know about is Schedule E. It really has several purposes, however the application that is related to yourself is reporting of leasing revenue and expenditures. The one section of Schedule E that you have to finish is the segment titled “Part 1″. Different essential tips to be aware of: if you own the rental property jointly with someone else who isn’t your husband or wife, report about the earnings that you received and the expenses that you accrued. On top of that, bear in mind that if you rented for just a part of the calendar year, or you were renting a portion of your own residence, you’ll need to distribute expenses concerning rental and non-rental purposes. Read the set of articles titled Tax Deductible Rental Property Expenses, included inside of this Guide, for further information.
Form 4562. Form 4562 is required to quantify depreciation for your property, that you can deduct at line 18 of Schedule E. For more info, see the article titled, Depreciation Expenses for Rental Property, that’s available in this Guide.
A general or limited partnership or S corporation is included.
Form 1065/1120-S. When you have a joint venture, you have to employ Form 1065, the form a partnership employs to report all its business activities. Form 1120-S is utilized by an S corporation to report enterprise activities. Your total leasing revenue or deficit are reported on Schedule K, line 2 of Form 1065 or 1120-S (Those documents are embedded with Schedule K).
Form 8825. This form functions similar to Schedule E, except that it’s for partnerships and S corporations. Schedule E and Form 8852 are in essence very similar. Ensure that you include full amounts of all income and expenses incurred by the partnership or corporation (Later, they will be allocated to each shareholder or business partner).
Schedule K-1. This document reports the total rental property profit or loss owing to each partner or shareholder as outlined by that business partner or investor’s property ownership interest. The elements of the K-1 sent to each and every partner has to be reported on her or his Form 1040, Schedule E, Part II.
Limited Liability Company Ownership
A single-member LLC is a disregarded entity for tax objectives, meaning that you may file as though you were an independent property owner (notice above). A multiple-member LLC has the option to be taxed either as a partnership or as an S corporation (see above).
Kent CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.
Many are leary of home office deductions, concerned that these deductions are more likely to encourage an IRS audit. The IRS claims there is no meat to this. Whatever the case, follow the rules and you should have no concerns.
The key to this tax deduction is that owners of rental properties may claim this deduction if they are active, which is to say you must be doing more than cashing checks. If you routinely spend a substantial amount of time preparing and maintaining properties, you will likely qualify as an ACTIVE rental property owner.
Once you’ve met this qualifier you will also have to meet the basic home office deduction thresholds. First, you have to use the home office exclusively for your rental business on a regular basis.
Then you’ll also have to meet at least one of the following:
1. Your home office is used as your primary place of business.
2. You must have no other location from where you run the administrative end of your property managment rental business.
3. You meet tenants in this home office space.
4. You use another structure on your property to conduct business.
After you have applied these threshold tests and determined that the work area in your home does in fact meet the requirements for the home office deduction, you will have to look into what kind of expenses are tax deductible. There are direct and indirect types. Direct expenses only benefit the home office area of the home such as painting or cleaning. Indirect expenses benefit the entire home and must be apportioned out between the office area and the rest of the house. Mortgage interest, insurance, property taxes and utilities are common examples of indirect expenses. Square footage is the conventional system of figuring out the proportion of the home office in relation to the entire house to come up with a percentage. A 2,000 square foot home with a 200 square foot home office area would mean 10% of the indirect expenses could be written off as part of the home office deduction. You can also depreciate the house structure (not the value of the land) in the same percentage over 40 years. However, this may complicate matters if you sell the house.
And you will want to ensure that you are keeping diligent records in case there is an audit. You will need to be able to prove that you were entitled to any claimed tax deductions. A diagram and/or a photo will support your claim of square-footage ratios. It is wise to have your home office address listed on business cards, letter heads, or other forms of communication. And when using your home office to meet tenants, it is wise to keep a record of meetings. You should keep relevant expense statements, such as utility bills, mortgage interest statements, insurance premium statements, property tax statements, and other pertinent expense statements.
Home office deductions can get complicated. Please do not consider this to be reasonable solution to the informed counsel of seasoned Edmonds CPA. But this should help you gain a basic understanding the requirements of successfully claiming home office deductions.
Everett Accountant +John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.
This chapter of the Rental Property Tax Guide concentrates on the various types of expenses that you may deduct from your gross rental income in order to figure the net rental income. As there is a variety deductible expenses, this guide breaks down the topic into four different varieties. This first chapter will concentrate on interest, advertising, and professional fee expenses.
If you’re renting a room in your home, or if it is a duplex and you’re occupying the other unit, you will need to pro rate the mortgage expense. (See the article titled Personal Use of Rental Property, included in this guide, for more on how to calculate personal use). Now if you are renting the property as its own living unit, you can deduct all of the mortgage interest you paid on Schedule E. Also, if you own only a part interest in the rental, you must multiply the total amount of mortgage interest paid on the property by your ownership interest. Be aware, however, that certain expenses you pay to obtain a mortgage (such as title/recording fees and commissions) are capitalized as part of your depreciable basis for the property, and are not expensed. See the article titled Depreciation Expenses for Rental Property, included in this Guide, for more on depreciation expense. Other types of interest may also be deductible, if you incurred the interest solely for the benefit of the rental property.
Any fees you incur to to list your property on the open market and advertise are deductible. For example, advertisements that you purchase in the local newspaper, or any Internet advertising you pay for, are deductible.
You can deduct professional fees you incur in connection with the rental. For example, if you paid a lawyer to write a rental agreement, or to initiate legal action to evict a tenant, you can deduct these fees. Furthermore, one can deduct costs paid to a certified public accountant for preparing the Schedule E of your tax return from the previous year. Make sure to pro rate the total preparation fee between the Schedule E and the rest of the tax return dependent upon the percentage of time it took. Any fees for preparing any section of the return separate from Schedule E must go on Schedule A as a personal tax preparation expense. Also, when you pay any commissions or management fees to a realtor group for overseeing your rental, you should deduct these expenditures likewise.
Edmonds CPA +John Huddleston has written several articles on accounting and other tax related matters of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.
A number of expenses incurred while preparing a property for rental (previous to ultimately renting,) are tax deductible. So let’s have a look at a couple of them.
Note: Startup expenses discussed here, are dissimilar to the expenses which qualify as deductible (in Internal Revenue Code section 195.) Under the section 195, certain startup expenses (in an active trade or business) are deductible up to $5,000 with this balance amortizable over a fifteen-year time frame. But, section 195 is inapplicable to rental property because renting is not thought of an active trade or business, but rather it is considered a passive activity. Find more information on active versus passive rules in the article entitled Tax Deductible Rental Losses.
Note: It isn’t just when you’ve actually rented a property that rental activity starts, but when you make the property available for rent or you have it out on the market.
The Expenses in Obtaining a Mortgage
Mortgage commissions, recording fees, and abstract fees (amongst other fees) are capitalized and thus become part of your basis in the rental property. Rather than expensing these fees all at once, you need to depreciate the expenses.
“Points” are charges paid by a borrower to take out a loan or a mortgage. This points or charges may also be called origination fees, or premium charges, or maximum loan charges. Points are deductible as interest, but require that you amortize the points over the life of the loan. Figuring out how many points to amortize per year is no simple task. Talk to a tax professional.
Improvements versus Repairs
You need to depreciate and capitalize all improvements to the property prior to putting the rental property on the market. Improvements prolong the use of the property or materially increase the market value of the property. On the other hand, you may freely deduct all repair expenses. A repair aims to keep your property in good working condition, not to increase the market value or prolong use. See the series of articles about deductions and depreciation, included in this Guide, for more information.
CPA +John Huddleston has written extensively on accounting and other tax related matters. He is a graduate of Washington State University and the University of Washington.
Let’s launch off by taking a look at the various entity selection types available. Each has advantages and disadvantages. As a rule of thumb, look to protect your property from unsecured creditors and limit liability. So let’s unroll the list and see what the options are…
When establishing an entity, you’ll have to visit Washington Entity Registration to complete the registration.
Note: This rental property tax guide will not serve to replace the qualified council of a certified public accountant or tax attorney. You should seek qualified professional help when establishing an entity and transferring ownership of a rental property.
This is the more common and the most straight forward method of ownership and occurs when you purchase a rental property in your name. This includes owning the property with your spouse, or as joint tenants or tenants in common with someone else. The main benefit is that this is straightforward, and doesn’t require the filing of any complicated paperwork or pay any lofty filing fees. The key disadvantage to this form of ownership is that your creditors could possibly force a sale of the rental property if they receive a court judgment against you, or compel you into involuntary bankruptcy.
Legal Entity Ownership
Legal entities include general partnerships, limited partnerships, limited liability companies, and corporations. The differences between the entities are important and outlined below. The major advantage to entity ownership is that your personal creditors can’t force a sale of the rental, because you don’t own it. The general partnership is the only type of entity that does not require registration with the Secretary of State. As far as taxes are concerned, the type of entity chosen doesn’t matter very much because in most cases, income from the rental property “passes through” from the entity and is taxed on a personal tax return (but do note the cautionary note under corporations). See the article entitled Necessary Tax Forms for Reporting Rental Activity, included in this tax guide for landlords, for more details on how rental income is taxed.
General partnership. This form of ownership takes place when two or more persons co-own a business for profit. With a general partnership each partner has equal management privileges, however each partner is personally liable for the debts of the partnership. And thereby a general partnership is most often not preferred.
Limited partnership. This entity is more complex than a general partnership because it requires both one limited partner and a general partner. The general partner has sole management rights, coupled with personal liability for any resultant debts. While, the limited partner isn’t personally liable for debts of the partnership and likewise has no management rights. This entity selection is generally not recommended.
Limited liability partnerships (LLPs) or limited liability company (LLCs). A limited liability partnership and a limited liability company are similar forms of entity selection. They both provide limited liability to the members/partners. This means that you are not personally liable for the entity’s debts, that is, unless the source of debts is your own wrongdoing. This form of ownership is often preferable because it decreases liability and reveals fewer formalities than those of the corporation.
Corporations. Corporations enable limited liability and perpetual existence. Although, they require the observance of rigid formalities so as to preserve the limited liability protection. In the absence of these formalities, a court mandate may very well “pierce the corporate veil” and hold you personally responsible. For this reason, LLCs and LLPs are generally more desirable for a rental property owner. Moreover, for the purpose of taxation, corporations are split into c-corps and s-corps. If a corporation is taxed as a “C” corporation, it will pay tax on the rental income, and then you will pay tax yet again when the corporation pays out dividends. You should steer clear of this “double taxation” snare.
Tax CPA +John Huddleston has written articles on taxes and finances for many years. He is a graduate of Washington State University and the University of Washington.
It is a very important that you give yourself due consideration in deciding where to buy, how to go about it, and what kind of practice to purchase.
Do Not Rush into This
Pace yourself. You are building the foundation of your future. Where do you want to live, how responsive will the community be to your new practice, how much of a rapport do you already have with the community?
Choosing the Best Location
Where would you like to live? You’ll want to be a big part of this community, so you’ll need to make sure it’s a good fit. Participating in local activities and mingling with neighbors will help your business grow. A short to medium commute is an important consideration. No one wants to face a long round-trip commute year after year.
What sort of community is the right fit for you and your family? Intercity or rural–what’s best for your family? Let the location of your competition inform your decision. Will your spouse be able to find work? Will your kids end up in a school district that will nurture them and grant you piece of mind?
Determine the Ideal Practice for You
Take special care in determining the size and type of dental practice that matches your preferences and needs. Do you want to practice general dentistry or do you prefer an expensive practice that focuses on cosmetic dentistry? Do you prefer a long client list with a five-day-a-week-schedule? Or maybe you’d prefer a smaller practice that allowed for more time off. These decisions affect your finances and stress levels–what can you reasonably make work?
Get the Proposed Business Appraised
Seek the counsel of a certified public accountant prior to purchase. They can find out how much other dentists have paid for similar practices. This will help ensure you are within the means of your projected income.
Assemble a Team of Professionals
Trying to save money by being completely self-sufficient is a poor decision when you plan on purchasing a dental practice. There are many areas where you’ll need and benefit greatly from the expertise of others. Trusted advisors can save you plenty of trouble. Here are some people you might want to have on your side:
- A CPA with a history of helping dental care practices and other small businesses on saving tax dollars and remaining tax compliant. You will need a Certified public accountant who can help you develop tax-saving strategies. You’ll want a cpa that can advise you on the best entity structure for your small business (S corporation, C corporation, limited liability company (LLC), professional limited liability company (PLLC), sole proprietor).
- A Bookkeeper who is versed in an accounting software system such as Quickbooks. A certified Quickbooks ProAdvisor is a level of distinction in which a bookkeeper certified by the makers of Quickbooks as skilled with the Quickbooks platform.
- A legal professional to review all documents related to the sale and to legally protect your interests in the future.
- A consultant for your new dental practice may well prove valuable in helping you avoid headaches and save money.
- From the beginning, you should establish a relationship with a bank. Getting prequalified, and ready to finance, informs how to put in a good offer and how much you can afford.
- An insurance rep will assess the value of your business and evaluate risk to see just how much coverage you’ll need.
- It is smart to seek the counsel of a mentor or business confidant of some kind, perhaps a veteran dentist who once went through the same process you’re going through now.
- A marketing pro that knows online marketing.
Tax CPA John Huddleston has a law degree and masters in tax law from the University of Washington School of Law. He has been a guest tax expert on the radio. He advises small businesses in the Seattle Bellevue Tacoma & Everett area on various tax and accounting issues. His firm, Huddleston Tax CPAs, also provides tax preparation service, QuickBooks consulting, business valuation, general accounting and bookkeeping service. Profile information on CPA John Huddleston and the CPAs employed by Huddleston Tax CPAs is available at CPA tax
accountant profile. Seattle CPA
John Huddleston is a frequent publisher of tax saving ideas.
Preparing Form 656 and Supporting Documentation in Filing for an Offer in Compromise of Back Taxes
An Offer in Compromise (OIC) is a tax settlement offer from the IRS to taxpayers, either an individual or a business unable to manage tax debt. There are certain strict criteria that determine who will be eligible to file for the OIC and if you satisfy these criteria, you will need to fill out Form 656 and submit a host of documents to be evaluated for an OIC.
Preparing Form 656 OIC
You need to fill out a Form 656 to file for an OIC in two circumstances. In the Doubt as to Collectability situation, there exists a reasonable amount of doubt over your ability to pay the full amount of your claims within the specified period. In the Effective Tax Administration case, your contention for a tax settlement is that paying the full amount of the dues will create economic hardship for you.
Now that you know the circumstances in which you will need to prepare Form 656, here’s what you should remember when completing the form
- If your claim to an Offer in Compromise is based on a Doubt as to Collectability, you need to also furnish a completed Form 433A if you are an individual taxpayer and Form 433B if you are a business taxpayer.
- If your claim to an Offer of compromise is based on Effective Tax Administration, then in addition to submitting a Form 433B or 433A, you’ll also need to fill out the info in the “Explanation of Circumstances.” You can include supplementary relevant information on separate sheets together with your social security and employer identification numbers.
- All persons submitting the offer should enter their social security numbers.
- You have to provide the names of both the parties when seeking a joint offer for joint liabilities. If you owe a liability jointly and both you and the other party are submitting for an offer, then do so on Form 656, just one form. Now, you may owe a liability, such as employment taxes for yourself and hold other liabilities, such as income taxes, with another person. If you are the sole submitter of this form, then you have to list all liabilities on one of Form 656. In case both of you want to submit this application, then you have to include all tax liabilities on your Form 656 and the other person must show only the joint tax liability on their Form 656.
- You will have to provide the appropriate information in every field on the Form 656.
- You will need to show the employer identification numbers of all businesses, except corporate concerns, that you own, either wholly or partly.
- In providing the total amount of your offer, you won’t include a sum that the Internal revenue service owes you or any of the amounts that you may have already paid in taxes.
- All persons submitting the offer should apply their signature on the 656 Form and provide the date. They need supply as well the titles and names of authorized corporate officers, trustees, Powers of Attorney, and executors when requested.
- Be sure that you disclose the name and if it is possible, the address of the person who may have prepared the OIC on your behalf.
- You may want the IRS to contact a a friend, a family member, or some other acquaintance to talk about your case so as to understand your scenario more fully. In that case, you will have to tick the “Yes” box in the “Third Party Designee” field. Additionally, if you would like a Certified public accountant, your attorney, or an enrolled agent to represent your case, you’ll need to provide the 2848 Form and submit it along with your offer. to increase the chances of your offer being accepted by the IRS. After you have gathered all the documents for submission, be sure that you make electronic copies or photocopies for your records. In addition to these documents, you may also submit documents that support your claim for the offer.
Pay Attention to the Details
Filing for the Offer in compromise is complicated. Ensure that you spend enough time on Form 656 and submit the entire set of supporting documents to strengthen your chances of success.
You can see more of our OIC guide at:
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