The Greenhornet Blog

Rental Property – Tax Benefits and Pitfalls

It’s late.  You can’t sleep.  So, you turn on the TV thinking you’ll watch some re-runs of MASH, or DRAGNET, right?  While channel surfing, you see some guy talking about how YOU, yeah, YOU!! Can make some big money( or dough, or moulah, or $$$$) in real estate without using any of your own money!   “Well,” you say to yourself, “now you’re talking!”  So, you reach for a cold beverage (adult or otherwise), some chips to munch on, and you get all nice and comfy because you are going to be driving a brand new Cadillac, and living in a new house with a swimming pool before the night is over!   At least, that’s what that guru on TV is telling you, right?

And, honestly, you could be driving a new Caddy, and living in a new house with a swimming pool by investing in real estate.  But, it won’t be overnight!   And, if you are not careful, you could also end up in the poor house, divorced, and with a really bad credit rating to boot!  So, let’s back up a bit and look at some tax angles first, shall we? 

First, put down the remote, take out a sheet or two of paper, and get ready to take some notes.  When you invest in rental property, you are going into the business of being a landlord.  You’ll own a residential house, duplex, tri-plex, or quad, or a commercial building.  You’ll be depreciating these properties using either a 27.5 year schedule or a 39 year schedule for commercial property, both with a “mid-month” convention.  You may have bought properties with appliances in them.  If your sales contract is written up in a certain way, you’ll be able to depreciate those appliances over 5 years.  If your properties are sitting on a lot or a larger piece of land, you must deduct that portion of land from the total cost to establish your basis which you’ll depreciate.  Land is never depreciated!

That guru on TV probably told you that if you buy a run-down piece of property, you can fix it up for just a few bucks and rent it out, right?  Or, flip it!  Let’s talk about the rental aspects, first, though.  If you are doing just cosmetic  things, like, painting, plastering, papering, we call that “repairs”.  You can write off repairs in the year you do those repairs.  If you are replacing the roof, putting in new flooring, a new bathroom, new cabinets, then those items will go toward the basis of the property and will be depreciated over the 27.5 or 39 year life of the property.  Unfortunately, Sec. 179 depreciation (a one time write-off depending upon income) is not available for rental property

Ok, you run out the very next day, see a property you like, make an offer, and buy that “dream” property.  It needs a lot of work before you can even rent it out, so you better get started.  It’s December 15th and you’re thinking you are going to get a big write-off this year for that property.  Sorry, bucko, not so fast!  Until that property is ready to be rented out, you can’t deduct or depreciate those costs.  Another reason to stop fiddling around and get going!

Up to this point, we’ve only been talking about the expenses and saying that you must keep track of them.  But, what about the income?  Well, that’s pretty darned important, too!  “OK,” you say, “Just tell me how I can rake in some dough from rents!”  Now, obviously, if the tenant is paying you rent each month, that is income to you.  How about the rent deposit?  Is that also income to you?  Well, yes and no.  If the rent deposit is just that a rent “deposit” and will not be applied to the last month’s rent, then you do not have to include it as rent at the time you receive it.  If, however, you intend to use that “deposit” as the last month’s rent, then you must show it as income at the time of receipt.  Of course, when your tenant moves out and you return his deposit, after deducting for any damage (or cleaning, if that is provided in your lease), then the amount you keep is income to you.  There are certain things that a tenant might do for you that are still considered income to you, even though, you don’t actually receive money.  For example, if you own a quad (4 units under one roof), and you give one tenant a discount on their rent because they are going to be your “on-site” manager, that discount is income to you.

While we are on the subject of rental income, many parents will purchase a house for their college-bound child in the town where the child will be attending school.  Mom/Dad, please make sure you have a lease and charge a fair-market rate of rent to your child.  If you don’t do this, the IRS could disallow all expenses incurred, including depreciation.  OUCH!

If you think the record-keeping requirements might be overwhelming for you, I highly recommend you seek out the skills of a good property management company.  And, their fee is also deductible to you.

Ok, that’s all the time we have for this edition of The Greenhornet Blog.  Next time, we’ll take a look at the tax aspects of flipping a piece of property.

Before we go, let me remind you that there are less than 30 days left to file your taxes.  April 15th will be here before you know it.  Please get with your Liberty Tax Service advisor pronto and get those taxes filed.  If all else fails, you can fax me your paperwork at 757-850-0842 or email me at raynations1@aol.com.

Finally, if you get a notice from the IRS that makes your blood pressure rise and your heart-beat become irregular, call me without delay.

Ray Nations, EA 

757-850-0840

If you find yourself in the lion’s den with the IRS, 

Call Ray Nations, Enrolled Agent, to tame that mess! 

Posted To: The Greenhornet Blog By: The Greenhornet Blog on 3/20/2013 11:15:27 AM
blog comments powered by Disqus
  • Connect with us on Facebook
  • Follow us on twitter
  • Connect with us on Tumblr
  • Connect with us on You Tube