Rental Properties and Taxes 101
If you own a rental, be sure you are reporting it correctly on your tax return. Here are a few tips on rental homes:
1. If you receive a 1099-M, be sure you report the exact amount on the tax return. For example, rental management companies will issue you a 1099-M showing rent but usually give you a statement showing the net amounts received. In this scenario, you would want to report the gross amount from the 1099-M and list the expenses on the rental schedule (as opposed to simply listing the net income). The IRS will attempt to match 1099’s to your tax return. If the gross amount is not listed, this could cause you to get audited. While the net affect won’t change, audits are not fun. Try to avoid them.
2. Be sure to place the house on the depreciation schedule and take depreciation each year. This will give you a decent sized expense that you do not want to miss out on.
Keep in mind that the land value is not depreciable. The best way to determine the land/building value is visiting the county website. The site separates the land and building value. Apply the percentage to the original purchase price of the home.
Keep in mind that the IRS assumes you have taken depreciation. If you do not, you will still be required to take into account the amount that should have been taken when you go to sell the home.
3. It’s important to know the difference between capital improvements and repairs. Typically, when we see high number in a clients “repairs” total, we will ask what the repairs were. An example of a repair is if you have to call the A/C repairman to simply repair the A/C unit. A capital improvement would be if he had to replace the entire unit. For capital improvements, you will list them on the depreciation schedule. You will need the date, the description, and the total.
4. There is no Section 179 depreciation allowed on rental properties. This is accelerated depreciation where you can take the entire amount of expense in one year.
5. If you actively participate in the rental, you can take up to $25,000 in rental losses each year. This amount starts phasing out when “adjusted gross income” goes above $100,000. If you make above $150,000, it is completely phased out. Do not make the mistake of factoring in a rental loss to discover your income has you completely phased out of the loss.
When in doubt with rental properties, be sure to ask a professional. We would be glad to answer any questions that you may have.