Deducting Rental Losses – Tax Deductions for Rental Property


Expertise, Integrity, Personalized Service Evan Hutcheson, CPA, LLC Hi this is Evan Hutcheson I’m gonna help
you file rental income or loss on the schedule E form of your individual tax return. I’m gonna use the IRS forms that I’ve downloaded
off the internet as a guide for filing. You might, the best way for you to file, if you’re going to file with the IRS using the IRS forms is to go through
their website to free fillable forms. It’s a pretty simple
process and they do a lot of the calculations for you. So when I’m filing, when I’m doing the guide
here, I’m going to assume you’re using the free fillable
forms and I’m gonna show you what calculations the free fillable
forms automatically calculate. So a lot of people, maybe you’re included
maybe you’re not, think that having rental revenue coming in as a surefire
way to have surplus of income. But it’s actually pretty common to have
a tax loss on rental activity due to all the interest and the depreciation and everything like that. You are normally not allowed to deduct
the tax loss since rental activity is considered a passive
activity, unless of course you’re a rental real estate professional, then it’s
your job and it’s not passive activity. However, if you actively participate in the activity, in the rental
activity, which means if you collect the rent yourself, if you call
the repairman yourself, if you don’t have like a management company doing all this
for you, you’re actually involved a little bit, then you are actively participating. If you’re actively participating, you can
deduct up to twenty-five thousand dollars or your
loss. Now, if you make more than a hundred
thousand dollars on your modified adjusted gross incomem that twenty five thousand dollars starts to fade away until you hit a hundred fifty thousand
dollars, when that loss completely goes away, you’re not allowed to deduct anything. So
basically if you make less than a hundred thousand dollars you can deduct
the full amount up to twenty-five thousand dollars. If you make more than a hundred thousand
dollars, that threshold starts to decrease until
you hit a hundred fifty thousand dollars, and when you hit a hundred fifty
thousand dollars of modified adjusted gross income, you
can’t deduct anything. So, I’m gonna go through this form real quick. The first question asks is do you make payments that would require you to file a 1099. So, if you made payments of over six hundred dollars to a subcontractor or an LLC doing some work, then the answer would be “yes,” and hopefully you filed a 1099. Because if you were marked, “yes” here and “no” here, that is not good. The IRS sees that and they do not like that very much because they know you should be filing a 1099. So, me personally, or this dummy John
Doe, this dummy tax return, I’m gonna put, “no” so we don’t even have to answer this question. Because he did not file, or he did not pay anyone over six
hundred dollars to do work on the house. We’ll just say it’s at 444 Main Street, and on the free fillable forms, the type of
property, I think you just, You can do a drop down, a
single-family residence on this, you see the type of property here, it’s no. 1, so I’m just going to put “1” right here. Fair rental days, we rented it for the full year, he rented it for the full year, so it’s 365 days. he had no personal days. If you have like,
there’s a certain law, if you have personal days of the rental properly of at least 14 days
out of the year, then you’re not allowed to deduct the
loss, you’re not allowed to deduct a portion of the loss at least, but in this scenario. we’re
assuming that you’re filing the return and this rental activity is for the full year,
this isn’t your personal house at all, it’s strictly a rental, your investment property. And we’ll just say for the rents received, you received $9,178. And then you can put your
advertising cost, your auto and travel, you can actually deduct mileage for your business, or for your investment activity right
here, or you can take actual expenses and
depreciation of the vehicle, depending on how much of the vehicle was used for this activity, you have to allocate it, cleaning and maintenance commissions,
insurance, you can take all of these expenses. We’re gonna say he had mortgage insurance at $881, and mortgage interest of $3,770. a few repairs totaling $368, so all these expenses are going to be totaled
right here, and under most programs, including the free fillable
forms, this is automatically filled in. so we also have real estate taxes or $937, we have utilities, of $2,198, a then we get to depreciation, which is
kind of a tricky one, you can depreciate your house that you’re renting out, you can depreciate
equipment that you purchase for the house, rental appliances, improvements to the
house. He’s only depreciating the house right
now. He paid $81,950, it was a good deal on a small house, and he can
depreciate that $81,950 house over twenty seven and a half years. So, you can go to publication 527, it’s the
residential rental property publication of the IRS. Go to chapter two: depreciation of rental property. I’m scrolling to the portion of that chapter that deals with
percentages of residential rental property, and how to depreciate it. You see year one, it’s not, it’s kind of a
weird percentage each month depending on what month
you placed it in service. By year two through years 27, excluding
that half a year at the very end, it’s all the same percentages, all 3.636
percent, which is one out of 27.5. So, if you put in one of these years, all
you need to do is take that amount of the house and
multiply it by 3.636 and this is his third year in renting this house, so he’s going
to do that. If it was the first year, the last or
the 28th year, then it would be a little bit different. But we’re taking 3.636 percent of $81,950, and we get a total of $2980. So, when you put all of these expenses in, this all he has, with them out and we’ll come up with the total. But he doesn’t have any other expenses
so we have a total right here which is $11,134, and subtract line 20 from line 3, this shows your income or your loss. In this case $11,134 is more than $9,078, so it’s going to be a loss of $1956. And you put that here too. there’s parentheses right there, so I’m not going put a negative sign ’cause that already means that it’s a negative. And then, 23a and 23c, and d and e, these all kind of fill in automatically through the free fillabel forms, and it’s
pretty simple too, it’s just asking for certain amounts up there on the top. So, total amounts reported on line 3 for all
rental properties, that was the income line so it’s $9178, this right here is the mortgage interest line,
so it’s $3770, this is the depreciation line, so it’s $2980, and 23 is the total amounts of expenses, so that’s back on line 20, $11,134. Now this will pop, this will fill in
automatically too usually. But 24, you have to input whether you have income or loss, and you have a loss, line 25 is the loss and that’s $1956 that:s way under $25,000, and this person John Doe did not make $100,00 I’m and the year 2013 so he gets the full amount of the $1956 loss so that would then go on his tax return right down here on line 17 negative $1956. Tax Preparation, Bookkeeping, Payroll Services Evan Hutcheson, CPA, LLC

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