Seeking advice on basic tax strategy

4 Replies

I currently have a condo in connecticut that i will be renting out in august. I am moving to a single family in texas. I am looking for advice on taxes from the basics. 

With this property going up for rent what are tax write off  examples?

When is it worth keeping track of all my possible write offs when the standard deduction is $20k?

Is my rental income taxed?

@Kyle Jenkins

Good first step into RE. 

FYI, the standard deduction does not prevent you from taking all the deduction related to rentals.  I know where you are coming from. If you take SD, you dont itemize, but the expense related to rental activity has nothing to do with itemize deduction.

Your rental income is taxed if you have net rental income. ( Rents- expenses- depreciation). 

This might be little confusing, but you might have tax loss, but still have actual cash flow from your rental because of depreciation(known as a phantom expense where there is no cash outflow).

There are various stuff that you can deduct.

Rather than giving you the entire list, let me say that you can deduct expenses that meet these two criterions:

  1. Ordinary Course of Business
  2. Necessary in the course of business

Here is the list some of the items:

1) Mileage: any mileage that is associated with the rental activity. Use apps like MilesIQ to keep track of it. Note: If you go to the same meeting each month, you can do detail tracking for a month, and can use same detail to estimate expense for rest of the year.( If nothing changed)

2) Meals when traveling away from home - 50% is deductible unless the meal is provided to the general public (like Open houses) than it is 100% deductible. Open House - Meals and entertainment (Balloons)

3) Expenses for Meeting with investor

4) Expenses For Meeting with realtor

5)Going to investors meetings. Mileage and meals

6)Money paid for RE tax book is also the tax deduction.

7)Any expenses that help you with RE investment can be deducted. Eg. HOA fee - If HOA fees are not paid, business will incur fines, so it is necessary to make the profit in the business.

8) Marketing expense and advertising

9) Cleaning and maintenance

10)Commission (Expenses like commission, abstract fees, recording fees to obtain your mortgage are not deductible but rather capitalized )

11) Insurance

12)Legal and other professional fees(Tax preparation for business, not personal part)

13)Management fee if applicable

14) Points- you generally cannot deduct the full amount the first year but have to deduct them over the term of the loan.

15) Repairs (Note always do repairs rather than improvements to rental because repairs are deductible right away and do not have to depreciate over few years as done for improvements. Repairs do not have to recapture when you sell the house too.)

16) Utilities

17) Pre rental expenses ( expenses incurred before finding a tenant )

18) If you use your Car: This can include- oil changes, Maintenance, gas, repairs, parking, tolls, and depreciation. If you use the personal car, make sure to keep detail record so that CPA can prorate the expenses between personal and business. This can include- oil changes, Maintenance, gas, repairs, parking, tolls, and depreciation. If you use the personal car, make sure to keep detail record so that CPA can prorate the expenses between personal and business.

19) Any equipment you rent for the rental business.

20) Mortgage interest and property taxes

21) There are many others and depends on specific situations.

22) Home office deduction:

Also, If your home qualify for a principal place of business for RE activity, any mileage to any rental property is deductible. I dont think you will ever drive from TX to CT, but if you happen to buy more houses for rentals. 

Okay great info! right now i am "repairing" the condo. Can i claim these expenses if it is not a rental property yet?

If i do my own work can i pay myself and claim that labor?

Can this just be a notebook with dated notes and a folder of reciepts?

Originally posted by @Kyle Jenkins :

Okay great info! right now i am "repairing" the condo. Can i claim these expenses if it is not a rental property yet?

If i do my own work can i pay myself and claim that labor?

Can this just be a notebook with dated notes and a folder of reciepts?

Hi Kyle,

There are "in service" rules, as well as repair/capitalization regulations that impact this.  First, the repair regulations.  In general, every "repair" expenditure needs to be capitalized (treated as an asset rather than an expense) and depreciated- expensed- over a number of years; how long depends on the life of the asset).  However, there are 3 "safe harbors" that can allow you to expense the "repair" immediately.  I am going to over-simplify all of them, talk to your CPA for more info.  The first is the de minimis safe harbor.  If the repair is less than $2,500, you can expense it immediately.  The second is the small taxpayer safe harbor.  Basically, if all of the work done on the property is less than a threshold amount, you can deduct it all.  The third is the routine maintenance safe harbor.  Essentially, if you can reasonably expect to make a similar repair within the useful life of the asset (not to exceed 10 years) you can deduct it.  Those are just the safe harbors; you can try to take the deduction without use of the safe harbors but the IRS may challenge it.

With the "in service rules" you need to have the property "in service" in order to take any deductions.  Essentially, you have to be holding it out to rent in order to take any expenses on it.  There is reasonable debate among CPAs about when a property is in service, so you may get different opinions on that.  It can be somewhat subjective.  The bright line rule is if you are receiving rental income on the property, it is in service.  My opinion is that if you are actively trying to get it rented out then it is in service.  However, I know some CPAs take the position that if you are getting it into a condition to be rented out, and it is rented out that calendar year, then it was in service the whole time.

In regards to whether you can deduct your own labor, in general no.  You cannot deduct your own labor, unless you also pick up your own labor as income which you do not want to do.

@Kyle Jenkins

Congrats on the purchase!

Yes - you are required to report your rental income on your tax return. Hopefully - you are cash-flow positive yet report little to no income on your tax return thanks to depreciation and other expenses.

You may not be entitled to start taking expenses until the property is ready for its intended use as a rental property which appears to be in August.
Gather up all the expenses from now to August because those will be added to basis and depreciated when you place the property in service.

The good thing about Texas is that the state does not have a state income tax. 
However, you may be required to file a Connecticut state tax return.