Ok, ive been looking and in the process of doing my income taxes… The biggest problem im running into is if i need to file schedule C or E, or Both. I have my regular fulltime 40hr/week job and then 2 rental properties and rehabing on the side. To me i think i need to file schedule C because i consider this a business as i try to aquire more properties to make a profit as well as put in a lot of time searching for these properties and not doing it as a hobby. But as ive been reading on this, i dont know if the IRS considers it a business and therefore filing Schedule E. Also for this year anyways, i will be claiming a big loss as i only had income on 1 dwelling for only half a year, therefore had almost a years worth of Utilities for both properties plus all my expenses. Since im going to have a big loss this year, does it just offset the income that i made off of my rentals, or does it offset income from my regular job as well. Also the loss so far does not take into any depreciation costs of either dwelling, my truck, or any equipment that i use. If i can get some advice as to what i should do here it would be greatly appreciated. Thanks Andy
Andy,
I answered part of this last time you asked. If you have losses from your properties and you make less than the IRS threshold, you can deduct your “passive losses” (i.e., real estate losses) from your active income (i.e., your J.O.B.)…I believe that you can deduct up to $25K in losses.
As for your rental properties, you need to file Schedule E “Supplemental Income and Loss” and Form 4562 for the depreciation of the proeprty and any major systems (roof? furnace? appliances? carpets?).
As for the rehabbing…someone more experienced will have to pipe in.
You might need the help of an accountant/tax advisor.
Keith
ok…i know im not going to have $25,000 in losses, so you think that i should start depreciating my houses, appliances, vehicle, and equipment to have a bigger Passive loss? Im not worried about my depreciations except for the houses. Lets say i depreciate the houses for the next 27.5 years, what happens when i sell them? Also, how do i know how much to start depreciating from the house…one house i have $40,000 invested, but worth $60,000, and the other i have $21,000 and worth $45,000. Do i start deducting from how much it is worth, minus the value of the land? let me know…Thanks Keith
Andy,
There are some flaky rules about having to depreciate investment property. Even if you chose not to depreciate, you must still reduce your basis in the property by the full amount that you could have dedudcted. When you sell, you have to recapture the depreciation so you are really just deferring the taxes.
Yes, you should depreciate…it’s a tax benefit.
Any passive loss you create that will lessen your active income is good.
The depreciation is the property value (I have current appraisals from the lender’s apparaisers) minus the value of the land (I use the value from the Parish tax office).
http://www.irs.gov/businesses/small/article/0,,id=137026,00.html
http://www.irs.gov/faqs/faq11-1.html
http://www.irs.gov/pub/irs-pdf/p527.pdf
Keith
Thanks again Keith, i have some reading to do. I will just have to read all this and put the puzzle together. I have a base knowledge of what and how to do this, but just need to get my ducks in a row and solve the problem. I will hopefully be able to get this done on my own, but may have to go to a tax pro.
For all you out there having your taxes done by a profesional, i encourage you to read through the tax booklet yourself and see what is out there for you to deduct. I spent 104 days in Palm Springs Cali for work without being reimbursed other than lodging and vehicle. Come to find out that i am eligible for a credit of $47 dollars per day. it comes out to be about an extra $500 that i will get back. I would never had found this, and my tax person would never had known i was out there.
Andy,
For your rental property, depreciation is your actual cost basis minus the land value. If your purchase cost plus actual rehab cost in each property is $40K and $21K, then you subtract the land value to determine your depreciation basis.
This example may help.
Let’s say that you purchased one property for $28K. The county tax assessor has the property assessed at $52K with $39K of that assessed value allocated to the improvements and the $13K balance allocated to the land. If you had paid $52K for this property, then your depreciation basis would be the same as the assessed value of the structure.
In your case you paid only $28K for the property, so we need to allocate a portion of your purchase price to the land and the rest to the structure. Looking at the tax assessment, note that 25% of the assessed value of the property is attributed to the land ($13K/$52K*100%). Using this ratio, you would allocate 25% of your purchase price to the land, leaving you with $21K as the cost of the structure.
Now, whatever you actually spent on rehab is added to the cost of the structure to get your depreciation basis. If you spent $12K, making your total investment in this property $40K, then your depreciation basis is $33K.
If you have a separate rehab business, then all your rehab business expenses and overhead costs will be reported on Schedule C. All your direct costs for your rental property activity are reported on Schedule E. Don’t blend the two business activities on the same tax schedule. If you did your own rehab, you can not include the cost of your labor in your rehab costs. You can only include your actual out of pocket expenses.
Consult a competent tax preparer for specific details.
Thanks for the valuable info Dave. I did my taxes today using the online Turbo Tax, but will need to go back and readjust since i didnt do the land percentage like you stated. Im also pretty sure you just answered my question about the rehabbing part of it, but your saying that i need to file Schedule C for other expenses? I spend a lot of time Driving to look for/at properties, spend a lot of time on the phone and many hours on the internet. I wasnt able to claim a lot of my deductions like internet expenses, phone bills and other misc. expenses because there wasnt really any place to add those expenses.
You said that you have a rehab business. Are you a licensed contractor? I’m guessing that you are not, and that you don’t have an established rehab business.
What properties are you spending driving time to look for?
If it is just your rental property, then you don’t have any mileage expense. If you kept accurate trip logs for your mileage between home and your rehab property, then you can take a mileage expense on Schedule E.
Tools you bought to rehab your own property, are personal expenses. So is the cost of your truck.
So your saying i need to be licensed to consider myself in business? If so i dont understand. I know all kinds of people that do home improvement that are not licensed and people that do lawn and landscape that are not licensed as well. Why wouldnt i be able to deduct tools that i buy to do my work. I dont buy them for my own good as i dont have no use for them outside of rehabing homes, or fixing problems at my current rental houses. The same goes for the pickup. I bought the pickup because i cant haul my lawn equipment in my Mustang to go maintain the yards, cant haul plywood, sheetrock and other building materials in it, and cant haul my gutted material to the dump in a car. Although this isnt my full-time job, I am working towards making it my fulltime job as i plan on doing another 2-3 houses this year and possibly aquiring a big commercial property that would require me to only work part-time at my regular job.
I dont want to cheat the system or do any of this wrong, but i also want my credits when they are due.
I am saying that you did not convince me that you have a rehab business. You are not a licensed contractor and you don’t appear to derive any income from rehabbing for others. From what you said originally, you appeared to be doing rehab only in properties you bought to hold for your own rental use.
I am not convinced that you have an established rehab business yet to justify the deductions you are talking about. Moreover, the truck and tools are not expenses to a rehab business. They are capital assets that get depreciated over time.
As I said before, the only vehicle related expense I see that you would be allowed to deduct for your rental properties is the mileage to visit and work on your properties.
Just my opinion.
Please consult your own licensed tax advisor for further details.
I agree with DaveT based upon my experience of preparing taxes as well as working with an EA (a tax prof.) do to mine now. The IRS is going to take a very close look if you claim real estate activities on ScH C; particularly if its not your primary source of income. Also, head over to the IRS wbiste and read the SchC Instructions as for the definition of a business. There are some very specific requirements outlined there.
IMHO, the last thing you need is the IRS probing your financial body cavities. It will only cost you money and take time away from finding profitable RE deals ;D
one more thought, if you do decide to go done that path of doing ScHC for the rehab business, then DEFINATELY get a tax professional involved to guide you.
i went without using schedule C and everything worked out ok. I worked it out using Schedule C and i would have only gotten about $75 more back if i would have deducted my other costs in there. So i went the safe route and left theat out to save a possible red flag from the IRS. I guess as you guys say it probably technically isnt a business untill i rehab them and start selling them, am i correct? So although it was my intentions with both properties, i find that it is more beneficial for me to refinance and use as a rental and generate some income off them and then (this year anyways) helps save money on my taxes.
Hey Black,
Read this following publications
523 Selling your home
946 How to depreciate Propety
You can find them on the IRS website.
I am an accoutant, so I can answer general questions if you have them.
But Dave was right on the money.
I have read literally thousands and thousands of posts in these forums and from what I can tell:
Dave T is always right on the money!
Keith
In California, an Owner-Builder does not need a contractor’s licence. I’m still considered a business owner since I pay business taxes and it is my source of income.
If I recall correctly you can only use this exemption twice in 3 years. Thus its not something that can be used as a sustainable business model.