Tax strategies for rentals
Architect · Wenatchee, WA · Member since 2018 · 843 posts · 907 votes
I have my first rental under contract. Though I understand taxes in a general sense and what to do for my own house I'm in the dark when it comes to whats different for rental properties. What are got strategies to look into and other options I have that I just dont compare to my personal house. So any advice on what to look into would be great. Both specific topics and possibly books or other resources that I can do some learning. Thanks in advance.
I have my first rental under contract. Though I understand taxes in a general sense and what to do for my own house I'm in the dark when it comes to whats different for rental properties. What are got strategies to look into and other options I have that I just dont compare to my personal house. So any advice on what to look into would be great. Both specific topics and possibly books or other resources that I can do some learning. Thanks in advance.
Congrats going under contract, Nik. I know you've been looking at a lot of options for a while. Sweet!
Any work you do to it before it's placed 'in service' will be added to your cost basis. Maintenance and repairs done after it's in service are deductible that (this) year. In service to me means advertised for rent at least, having an approved tenant pending, better. If already rented, you don't have to worry as it's obviously already in service.
Another trick I use is I don't replace an entire cap ex, like a roof all at once. If completely replaced, it has to be depreciated. If less than, say, 76%, it can be a repair and deducted that year.
Obviously you'll have buikding depreciation to help tax-wise. On a small rental, cost segregation is probably a waste. Just go straight line 27.5 years.
Unfortunately all tax pros are suoer busy right now so your stuck with street guys like me. Hopefully the pros will be available next week. Congrats again!
Not really. I find it immature.
Not really. I find it immature.
Nope, reconsidered. It's way too late at night for this.
@Steve Vaughan
Does this mean that if I buy a rental for brrrr and before I start rehabbing, I advertise for rent then I can deduct the repair cost?
I'm copying a year-old answer by a colleague of mine, CPA Linda Weygant. I completely agree:
Running an ad does not place your property "in Service", which is the key point in time at which you can begin expensing your renovations rather than capitalizing them.
In order to be "In Service", the house must be habitable. Different codes vary, but generally it means that it has to have a functioning roof, walls, doors, windows, kitchen and bathrooms. Until you have all of these things, your house is not In Service.
Another thing to consider is this. Let's say you're working on the house and there's a sign in the yard saying "For Rent". Somebody comes and knocks on the door and asks to look at the house. Ask yourself this. If they meet all your rental criteria, could they move into the house that day? That is, is the work you are doing just a few punch list items, but the house is essentially habitable and ready for them to move in? Or would they be unable to move in because you're still laying flooring and painting walls?
Unless or until the answer is "Yes, they can move in today", your house is not In Service.
Linda Weygant
Theory is good but in reality, you have to put how many days the house been rented the tax year.
The house was ready and even lease was signed on December 15, 2018, however, the Tenants didn't move in until February 1st, 2019.
The days rented in 2018 was zero. So, how can you deduct all the expenses even when house technically rented?
I have my first rental under contract. Though I understand taxes in a general sense and what to do for my own house I'm in the dark when it comes to whats different for rental properties. What are got strategies to look into and other options I have that I just dont compare to my personal house. So any advice on what to look into would be great. Both specific topics and possibly books or other resources that I can do some learning. Thanks in advance.
This may seem fairly elementary and I apologize if I'm reverting to something way too basic, but for the most part, your rentals will be reported on a cash basis. Meaning you can write off the expenses when you pay for them. As an example, if you purchase additional paint for touch ups throughout the year, you can expense it all at once. If you have the cash at the end of the year, don't forget to make the Dec 31st purchases for all of the materials you will be using throughout the year to capture them in the year prior....
Also, depending on your income, the first $25k of rental "losses" (After taxes, interest, depreciation, etc.) can be used to offset your W-2 income. Be sure you maximize those losses whenever you can.
@Steve Vaughan
Does this mean that if I buy a rental for brrrr and before I start rehabbing, I advertise for rent then I can deduct the repair cost?
I'm copying a year-old answer by a colleague of mine, CPA Linda Weygant. I completely agree:
Running an ad does not place your property "in Service", which is the key point in time at which you can begin expensing your renovations rather than capitalizing them.
In order to be "In Service", the house must be habitable. Different codes vary, but generally it means that it has to have a functioning roof, walls, doors, windows, kitchen and bathrooms. Until you have all of these things, your house is not In Service.
Another thing to consider is this. Let's say you're working on the house and there's a sign in the yard saying "For Rent". Somebody comes and knocks on the door and asks to look at the house. Ask yourself this. If they meet all your rental criteria, could they move into the house that day? That is, is the work you are doing just a few punch list items, but the house is essentially habitable and ready for them to move in? Or would they be unable to move in because you're still laying flooring and painting walls?
Unless or until the answer is "Yes, they can move in today", your house is not In Service.
Linda Weygant
Theory is good but in reality, you have to put how many days the house been rented the tax year.
The house was ready and even lease was signed on December 15, 2018, however, the Tenants didn't move in until February 1st, 2019.
The days rented in 2018 was zero. So, how can you deduct all the expenses even when house technically rented?
It is in service when it is rent ready. You don't put how many days it was rented, you put how many days it was available to rent. The purpose is to differentiate personal use from rental use.
"You don't put how many days it was rented, you put how many days it was available to rent."
At the risk of being a tax practitioner on this thread correcting someone...you're actually supposed to report number of days the property was rented at fair market value on Schedule E.
Software will examine the fair market rented (FMR) days and the relationship of the FMR days to the personal use days for treatment under Sec 280A (which involves personal use of rentals and properties rented less than 15 days).
The tax treatment for a property available to rent 365 days during the tax year but rented 0 days is much different than a property rented at fair market rates for 365 days.
"You don't put how many days it was rented, you put how many days it was available to rent."
At the risk of being a tax practitioner on this thread correcting someone...you're actually supposed to report number of days the property was rented at fair market value on Schedule E.
Software will examine the fair market rented (FMR) days and the relationship of the FMR days to the personal use days for treatment under Sec 280A (which involves personal use of rentals and properties rented less than 15 days).
The tax treatment for a property available to rent 365 days during the tax year but rented 0 days is much different than a property rented at fair market rates for 365 days.
My accountant disagrees, but he is not here to argue with you and I don't want to argue for him.
In my case it really doesn't matter, because personal use is 0 days on all my properties. The purpose of line 2 on schedule E is to determine the split between rental and personal. In my case with 0 personal days, no matter number is used, it is 100% rental. I can acquire a new property in December and assuming it is available to rent, I can claim expenses, even if I was unable to rent the property until January. Maybe I take a loss for one month, but how is that any different than any other vacancy? I have other rental income to offset the loss. I don't follow how the tax treatment is different when you have vacancy.
I guess if I only owned one rental property and it sat vacant 365 days a year, then yes that would appear more like a hobby. That is not my case though.
I am surprised any accountants have free time to debate on April 15...
@Joe Splitrock
It's pretty easy to verify who is correct based on the Schedule E instructions... If you're a practitioner, it also makes sense why it would be actual days rented vs days available to rent based on the mechanics of Sec 280A.
"I am surprised any accountants have free time to debate on April 15..."
Thank you for the insinuation; very kind of you. April 15th is usually not a busy day for me. Almost everything with a statutory deadline of April 15th that hasn't been filed at this point is on extension. The few things that haven't are slowly getting extended before end of day.
On the contrary, if a practitioner is slammed or very busy on April 15th I'd be concerned that he/she has poor engagement management and/or time management skills...
I'm done with this thread... It is no longer about putting correct information out there but has devolved into character attacks and who gets the last post. Come on...
@Joe Splitrock
It's pretty easy to verify who is correct based on the Schedule E instructions... If you're a practitioner, it also makes sense why it would be actual days rented vs days available to rent based on the mechanics of Sec 280A.
"I am surprised any accountants have free time to debate on April 15..."
Thank you for the insinuation; very kind of you. April 15th is usually not a busy day for me. Almost everything with a statutory deadline of April 15th that hasn't been filed at this point is on extension. The few things that haven't are slowly getting extended before end of day.
On the contrary, if a practitioner is slammed or very busy on April 15th I'd be concerned that he/she has poor engagement management and/or time management skills...
I'm done with this thread... It is no longer about putting correct information out there but has devolved into character attacks and who gets the last post. Come on...
I apologize. I am probably just touchy, because it seems every time the accountants come to a thread it turns into a "you are wrong" blood bath. Half the time they are arguing with each other or insulting the rest of us, saying we need a CPA. In my case I spend good money on a CPA every year and now I am just told he is a hack that can't follow instructions.
My CPA has been doing this 30 years and he has put 365/0 on my schedule E for 15 years. Are you telling me that I need to account for vacancy in that number? So if it sits for 30 days, it is 335 days? What about if the tenant is in the unit, but not paying rent "fair market rent" for some of those days? What if it is multifamily and some units are vacant part of the year? If it is a 10 unit, are you saying we need to claim 1/10 of a day for vacancy for each unit? The instructions are not clear on how to deal with these situations.
I just thought the purpose of line 2 was to determine percentage of personal use. That is the examples that the instructions focus on. Assuming personal use is always 0, does it matter what I put in the rental days number? Will it alter my taxes?
@Joe Splitrock
It's pretty easy to verify who is correct based on the Schedule E instructions... If you're a practitioner, it also makes sense why it would be actual days rented vs days available to rent based on the mechanics of Sec 280A.
"I am surprised any accountants have free time to debate on April 15..."
Thank you for the insinuation; very kind of you. April 15th is usually not a busy day for me. Almost everything with a statutory deadline of April 15th that hasn't been filed at this point is on extension. The few things that haven't are slowly getting extended before end of day.
On the contrary, if a practitioner is slammed or very busy on April 15th I'd be concerned that he/she has poor engagement management and/or time management skills...
I'm done with this thread... It is no longer about putting correct information out there but has devolved into character attacks and who gets the last post. Come on...
I apologize. I am probably just touchy, because it seems every time the accountants come to a thread it turns into a "you are wrong" blood bath. Half the time they are arguing with each other or insulting the rest of us, saying we need a CPA. In my case I spend good money on a CPA every year and now I am just told he is a hack that can't follow instructions.
My CPA has been doing this 30 years and he has put 365/0 on my schedule E for 15 years. Are you telling me that I need to account for vacancy in that number? So if it sits for 30 days, it is 335 days? What about if the tenant is in the unit, but not paying rent "fair market rent" for some of those days? What if it is multifamily and some units are vacant part of the year? If it is a 10 unit, are you saying we need to claim 1/10 of a day for vacancy for each unit? The instructions are not clear on how to deal with these situations.
I just thought the purpose of line 2 was to determine percentage of personal use. That is the examples that the instructions focus on. Assuming personal use is always 0, does it matter what I put in the rental days number? Will it alter my taxes?
Same here, Joe. I only commented because the OP is a personal friend from my town. My days of getting slapped or patted on the head in tax threads are over.
But..regarding the days rented. @Chris Mason had a good point. If you will be trying to qualify for a mortgage, put actual days rented down. To calculate income, underwriters divide gross rents by days rented. Especially important if purchased that year. Peace!
@Joe Splitrock
It's pretty easy to verify who is correct based on the Schedule E instructions... If you're a practitioner, it also makes sense why it would be actual days rented vs days available to rent based on the mechanics of Sec 280A.
"I am surprised any accountants have free time to debate on April 15..."
Thank you for the insinuation; very kind of you. April 15th is usually not a busy day for me. Almost everything with a statutory deadline of April 15th that hasn't been filed at this point is on extension. The few things that haven't are slowly getting extended before end of day.
On the contrary, if a practitioner is slammed or very busy on April 15th I'd be concerned that he/she has poor engagement management and/or time management skills...
I'm done with this thread... It is no longer about putting correct information out there but has devolved into character attacks and who gets the last post. Come on...
Eamonn, you were fair to me. I also appreciated the help. I did not mean to offer you offense.
@Nik Moushon In addition to tax strategies I would also consider asset protection as your journey forth with rental properties. There are many valuable resources here on BiggerPockets. One article that may be of interested is: https://www.biggerpockets.com/blog/cheap-free-steps-today-pro/
@Steve Vaughan
Does this mean that if I buy a rental for brrrr and before I start rehabbing, I advertise for rent then I can deduct the repair cost?
I'm copying a year-old answer by a colleague of mine, CPA Linda Weygant. I completely agree:
Running an ad does not place your property "in Service", which is the key point in time at which you can begin expensing your renovations rather than capitalizing them.
In order to be "In Service", the house must be habitable. Different codes vary, but generally it means that it has to have a functioning roof, walls, doors, windows, kitchen and bathrooms. Until you have all of these things, your house is not In Service.
Another thing to consider is this. Let's say you're working on the house and there's a sign in the yard saying "For Rent". Somebody comes and knocks on the door and asks to look at the house. Ask yourself this. If they meet all your rental criteria, could they move into the house that day? That is, is the work you are doing just a few punch list items, but the house is essentially habitable and ready for them to move in? Or would they be unable to move in because you're still laying flooring and painting walls?
Unless or until the answer is "Yes, they can move in today", your house is not In Service.
Linda Weygant
This article by @Brandon Hall seems to be claim differently. Curious of his input on this!
@Steve Vaughan
Does this mean that if I buy a rental for brrrr and before I start rehabbing, I advertise for rent then I can deduct the repair cost?
I'm copying a year-old answer by a colleague of mine, CPA Linda Weygant. I completely agree:
Running an ad does not place your property "in Service", which is the key point in time at which you can begin expensing your renovations rather than capitalizing them.
In order to be "In Service", the house must be habitable. Different codes vary, but generally it means that it has to have a functioning roof, walls, doors, windows, kitchen and bathrooms. Until you have all of these things, your house is not In Service.
Another thing to consider is this. Let's say you're working on the house and there's a sign in the yard saying "For Rent". Somebody comes and knocks on the door and asks to look at the house. Ask yourself this. If they meet all your rental criteria, could they move into the house that day? That is, is the work you are doing just a few punch list items, but the house is essentially habitable and ready for them to move in? Or would they be unable to move in because you're still laying flooring and painting walls?
Unless or until the answer is "Yes, they can move in today", your house is not In Service.
Linda Weygant
This article by @Brandon Hall seems to be claim differently. Curious of his input on this!
Please read the discussion in the comments to this article
@Steve Vaughan
Does this mean that if I buy a rental for brrrr and before I start rehabbing, I advertise for rent then I can deduct the repair cost?
I'm copying a year-old answer by a colleague of mine, CPA Linda Weygant. I completely agree:
Running an ad does not place your property "in Service", which is the key point in time at which you can begin expensing your renovations rather than capitalizing them.
In order to be "In Service", the house must be habitable. Different codes vary, but generally it means that it has to have a functioning roof, walls, doors, windows, kitchen and bathrooms. Until you have all of these things, your house is not In Service.
Another thing to consider is this. Let's say you're working on the house and there's a sign in the yard saying "For Rent". Somebody comes and knocks on the door and asks to look at the house. Ask yourself this. If they meet all your rental criteria, could they move into the house that day? That is, is the work you are doing just a few punch list items, but the house is essentially habitable and ready for them to move in? Or would they be unable to move in because you're still laying flooring and painting walls?
Unless or until the answer is "Yes, they can move in today", your house is not In Service.
Linda Weygant
This article by @Brandon Hall seems to be claim differently. Curious of his input on this!
He actually says in the article that the IRS requires it to be "ready and available". He defines available as advertising and he states ready would be after substantial rehab is complete. I would use common sense. If you tear down to the studs, claiming it is ready is difficult to defend. If you are doing some painting or updating some light fixtures, it is easy to argue it could be rented without things things complete.
@Steve Vaughan
Does this mean that if I buy a rental for brrrr and before I start rehabbing, I advertise for rent then I can deduct the repair cost?
I'm copying a year-old answer by a colleague of mine, CPA Linda Weygant. I completely agree:
Running an ad does not place your property "in Service", which is the key point in time at which you can begin expensing your renovations rather than capitalizing them.
In order to be "In Service", the house must be habitable. Different codes vary, but generally it means that it has to have a functioning roof, walls, doors, windows, kitchen and bathrooms. Until you have all of these things, your house is not In Service.
Another thing to consider is this. Let's say you're working on the house and there's a sign in the yard saying "For Rent". Somebody comes and knocks on the door and asks to look at the house. Ask yourself this. If they meet all your rental criteria, could they move into the house that day? That is, is the work you are doing just a few punch list items, but the house is essentially habitable and ready for them to move in? Or would they be unable to move in because you're still laying flooring and painting walls?
Unless or until the answer is "Yes, they can move in today", your house is not In Service.
Linda Weygant
This article by @Brandon Hall seems to be claim differently. Curious of his input on this!
Am I reading the article incorrectly? Both the article and the quote above seem to describe "ready" and "available" (i.e., In Service) the same way to me. A property must be advertised and ready for a tenant to be able to move in in order for the In Service period, and thus the direct expense tax deductions, to begin.
@Nik Moushon to answer your initial question to get more educated, I would read NOLO guide Every Landlords Tax Deduction Guide. They have it in my local public library. You may also find a Dummies Guide to Rental Properties at your library which also touches on the tax aspect.
I would also recommend reading these IRS Schedule E instructions. I would also download a Schedule E and look through categories and understand how the form works.
@Tony Kim
“For fair rental days, put the number of days the property was actually rented and producing income. This is especially important if you have rented the property for 14 days or less as then your rental income won’t need to be reported.”
https://www.therealestatecpa.com/ultimate-guide-irs-schedule-e/
From Brandon’s article this year...
What’s odd with posters mentioning they are getting swatted by tax pro’s when posting about tax is that either you are asking a question that you haven’t run by a tax pro and you don’t like the answer you are getting, or you have a tax pro and are second guessing him/her on this forum and still not liking what you are getting in response... neither of which we can control.
Also you have to understand we have professional and ethical responsibilities, not to mention risk mitigation. At a certain point we have to guard against allegations of improper tax advice. So when you see one of us say “consult your tax pro” or “you should get a CPA involved”, we are not soliciting for service, we are both protecting ourselves and trying to protect you as well.
Hope this shines a light on part of the discussions.
@Tony Kim
“For fair rental days, put the number of days the property was actually rented and producing income. This is especially important if you have rented the property for 14 days or less as then your rental income won’t need to be reported.”
https://www.therealestatecpa.com/ultimate-guide-ir...
From Brandon’s article this year...
What’s odd with posters mentioning they are getting swatted by tax pro’s when posting about tax is that either you are asking a question that you haven’t run by a tax pro and you don’t like the answer you are getting, or you have a tax pro and are second guessing him/her on this forum and still not liking what you are getting in response... neither of which we can control.
Also you have to understand we have professional and ethical responsibilities, not to mention risk mitigation. At a certain point we have to guard against allegations of improper tax advice. So when you see one of us say “consult your tax pro” or “you should get a CPA involved”, we are not soliciting for service, we are both protecting ourselves and trying to protect you as well.
Hope this shines a light on part of the discussions.
I'm not sure this is an apples to apples comparison. I'm referring to when a property is ready and available for use, which is the critical date on when an expense can be deducted as opposed to capitalized and added to the depreciation basis.
I believe the 'fair rental days' data is needed for something completely different (i.e., the ratio of days rented vs. personal use).
https://www.irs.gov/publications/p527#en_US_2018_publink1000219036
The IRS link above clearly defines when a property is ready and available, which is measured differently than fair rental days. I don't disagree with the definition of fair rental days in your link above.
@Tony Kim
“For fair rental days, put the number of days the property was actually rented and producing income. This is especially important if you have rented the property for 14 days or less as then your rental income won’t need to be reported.”
https://www.therealestatecpa.com/ultimate-guide-ir...
From Brandon’s article this year...
What’s odd with posters mentioning they are getting swatted by tax pro’s when posting about tax is that either you are asking a question that you haven’t run by a tax pro and you don’t like the answer you are getting, or you have a tax pro and are second guessing him/her on this forum and still not liking what you are getting in response... neither of which we can control.
Also you have to understand we have professional and ethical responsibilities, not to mention risk mitigation. At a certain point we have to guard against allegations of improper tax advice. So when you see one of us say “consult your tax pro” or “you should get a CPA involved”, we are not soliciting for service, we are both protecting ourselves and trying to protect you as well.
Hope this shines a light on part of the discussions.
The "Minimal Use Rule" is for people who have dual usage, personal and rental. The IRS is specific that this rule applies if two conditions are met, it must be used for personal as a residence and rented less than 15 days.
This rule does not apply to landlords who already own rentals and acquire new properties late in the year, resulting in few rental days. Think about it logically. If I buy a property December 1 and it is vacant, then nobody moves in until after January 1, the implication here is that I could not expense closing costs, mortgage interest, renting expenses, utilities, etc. However if I closed January 1 and someone moves in February 1, all those same expenses can be claimed? That is illogical and not at all what the IRS intends here. If I am active in the rental business and acquire a new property in December or January, the tax treatment is identical.
Read the exact wording from the IRS website below. If the rule applied regardless of personal use, it would say "or" instead of "and". This 14 days minimal rental rule is for a specific situation.
There's a special rule if you use a dwelling unit as a residence and rent it for fewer than 15 days. In this case, don't report any of the rental income and don't deduct any expenses as rental expenses.
@Steve Vaughan
Does this mean that if I buy a rental for brrrr and before I start rehabbing, I advertise for rent then I can deduct the repair cost?
I'm copying a year-old answer by a colleague of mine, CPA Linda Weygant. I completely agree:
Running an ad does not place your property "in Service", which is the key point in time at which you can begin expensing your renovations rather than capitalizing them.
In order to be "In Service", the house must be habitable. Different codes vary, but generally it means that it has to have a functioning roof, walls, doors, windows, kitchen and bathrooms. Until you have all of these things, your house is not In Service.
Another thing to consider is this. Let's say you're working on the house and there's a sign in the yard saying "For Rent". Somebody comes and knocks on the door and asks to look at the house. Ask yourself this. If they meet all your rental criteria, could they move into the house that day? That is, is the work you are doing just a few punch list items, but the house is essentially habitable and ready for them to move in? Or would they be unable to move in because you're still laying flooring and painting walls?
Unless or until the answer is "Yes, they can move in today", your house is not In Service.
Linda Weygant
This article by @Brandon Hall seems to be claim differently. Curious of his input on this!
Dear Lord please stop giving this article more hits. The article is wrong. The author was told the article was wrong at the time, but he refused to believe it. Something like two years later, he admitted (in the comments on another thread) that he had misinterpreted a court case upon which he was relying when he wrote this article.
This one article has been responsible for more headaches in my practice and those of my colleagues than any other single piece of writing, I think.
I and several other CPAs have begged BP to take this blog post down. The author claims he asked them to remove it as well. But people keep finding it and BP keeps plugging it and I am just so freaking tired of people pointing to it as authoritative because it's something they want to believe.
Don't give in to confirmation bias.
Don't get me wrong. I like Brandon a lot as a person. He's friendly, personable and pretty knowledgeable, but in this article, he was just plain wrong. It happens to the best of us and there's no shame in it.
When that article first came out, I lost a couple of clients because they were sure that I was the one who was wrong. Since then, I've had no less than ten or twelve new client interviews every year where somebody brings up this article. I have an entire three paragraph essay that I send to those people to discuss it.
@Mindy Jensen - PLEASE????