All Forum Posts by: Natalie Kolodij

This is one of the big issues with people consdier an entity a "business" vs. a property the business. The idea of an operating company for the rentals so everything goes through an LLC- but based on everything every attorney has told me, it won't protect you legally....and also...it's wrong reporting for tax purposes. It happens a lot with single member LLC's and it's less of a big deal- but you've now run into the issue with incorrec ownership reporting for partnerships. 

This happens all the time and now it's quite the pickle. 

And the tax implications may or may not have been the same if reported correctly as partnerships have their own loss limitation levels as well before reaching the property passive loss limits. 

Um no you can't deduct everything in your house in shared areas. You get a percentage of expenses based on business vs personal %. 

I live in 1/2 of the house (sqft). However it is only 1 bedroom: I rent 3 bedrooms on AirBnB. My research told me to split common bills on tax return either per sqft or per bedroom. Do I get to chose? (If yes, the bedroom split is much more in my favor). Bills I can think of in this category: Mortgage Interest, Insurance, Utilities, ...

Not accurate- You need to use square footage not bedroom numbers. Because you may have a 600 sq foot master, and be renting 3 100sq ft. bedrooms and you can't claim 75% business use. It's based on sq footage for business vs. personal...and then shared areas you get to take a pro-rata amount. 

2) I have consumable expenses (Shampoo, Towels, Sheets, ...). I believe I can deduct these, or am I mistaken?Deductible. 

3) What about other expenses such as furnitures, electronics, wall insulation, plumbing in the rented space? Does it fall into the 100% deductible (as in not divided per sqft/bedroom), amortized over X years category? No- Allocate based on business vs. personal use. 

4) What about expenses such as retro-fitting the place to get it airbnb-ready (I had to add doors, buy keypad locks, smart thermostats, ...) Capitalize and Depreciate/ Start up Expense. 

5) I do a lot of the work myself. Instead of having a contractor bill, I have receipts from the hardware store. Are tools & parts deductible? Yes- again depends on business vs personal as well. 

And also important to note that depreciation is only allowable on 100% business use areas (those rental bedrooms/baths) NOT kitchen/living shared spaces. 

But for split on business vs. personal for expense splits you can take a % of the shared spaces to allcoate as well. 

*Leans in real close to whisper the best way to save money on your taxes..*

Hire a real estate specailized tax professional. 

@Steven Hamilton II has a Florida office but he's REI specailized and works with clients all over the US as well.

Everyone doing anything in CA for any reason with an LLC pays that $800. 

Reach out to Traner Smith in Edmonds 

Great CPA firm, Have a REI specailized partner

There arne't really options here. 

If you just own these rentals in your name, or a SMLLC they go on schecdule E of your 1040. Your report all income and related expenses (including depreciation ) there. 

If you don't know how to accurate setup/calculate deperciation I would recommend working with a professional. Especially if buying more is the goal- since you'll need good/ lendable tax returns to base your next purchases on.

Quote from @Parth Patel:

Originally posted by @David M.:

@Parth Patel

To expand on Ms. Kolodij comments, your house hacking will probably generate little deductions to offset your passive rental income.  Realize that while you may be paying tax at your ordinary icome rate, at least you will be keeping the remaining $0.60 on the dollar.  If you are paying taxes, you are making money.  Just pay efficiently.

Since you have to partition your deductions, on a house hack like yours I don't believe its very much.  Any space you also use will be considered personal, e.g. kitchen, living room, etc.  So, just the square footage of the bedrooms that will your tenant's personal space will be deductible.  Unless you have a house that has huge bedrooms and small living space, that means your deductions (e.g. depreciation, taxes, utilities) will be a minority fraction of the entire amount.

Look up passive income.  Only under certain participation conditions and income limits can you take more than $3k losses on your 1040.  People talk about the tax deductions associated with being a landlord, but its not for reducing your day job's taxable income.  Its for offseting the incoming passive rent.

Good luck.

I've read there are different ways of partitioning the deductions from personal and passive, either sq ft or number of bedrooms. If I'm staying in 1 bedroom out of 4 and renting out the other 3, I believe my deductions would be 75%. If however, I only used the bedroom sqft, then the shared spaces aren't counted I would have a much lower deduction %. Which one is typically used? sqft or bedrooms?

 Using number of rooms is not a reasonable method. 

Square footage needs to be used. You can't occupy a 600 sq foot master while renting 3 100 square foot bedrooms adn claim 75% business use. Number of bedrooms is not an accurate allocation method. 

Additionally- For expenses you can take a ratio on the shared spaced. 

For depreciation you can not. 

Quote from @Jon Fletcher:

Hi @Parth Patel and @Natalie Kolodij I would have thought that purchasing the property through an LLC would be a no-brainer. Because it reduces liability and allows for all the property-related expenses to be treated as business expenses. It essentially creates two clear buckets; your personal income (W2) and expenses, and your business income and expenses.

Nope. An LLC changes nothing for your tax situation or income buckets.

And the only way an LLC potentially, offers any protection is if it's fully separate from you personally. 

So if you're living in an LLC owned asset- you're already co-mingled.

It's only a no-brainer if you don't understand what they do/don't do/ how they work. 

Most firms charge at least $1200 for any entity return filing.