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Merlo
Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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I own a company that is registered in St Lucia and it in turn

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I own a company that is registered in St Lucia and it in turn owns a rental villa that is part of a resort in Jamaica that is rented during the year. This is the first year that I have owned the property and have significant losses attributed to it due to extensive renovations and maintenance costs without income for most of the year. Are my losses deductible and if so, what form should I report the property on?
Submitted: 5 years ago.
Category: Tax
Expert:  Merlo replied 5 years ago.
HelloCustomer

What type of company owns the rental property? Is this set up as a partnership, S Corp,,,?

Do you actively participate in the management of this rental property?

Is your modified adjusted gross income more than $150,000 for the year?
Customer: replied 5 years ago.

It's a S Corp registered in St Lucia, but I'll need to check since it may also be a C corp? Will this make a big difference?

 

The property is managed by Tryall Club which is the resort in Jamaica where the property is located. We pay an annual maintenance and membership fee which covers the on going property management and supervision, since we do not live in Jamaica.

 

Modified adjusted gross Income is over $150,000.

Expert:  Merlo replied 5 years ago.
Hello againCustomer

First, let me explain the difference from a tax standpoint of a C Corporation and an S Corporation. With a C Corporation, you are taxed at both the corporate level and then again at the shareholder level. If you had a C Corporation which had profits, those profits would be taxed at corporate rates. Once those profits were then distributed to the shareholders, the shareholders would again be taxed on those profits based on their individual tax brackets.

With an S Corporation, there is no tax at the corporate level. All of the income flows through to the shareholders either in the form of wages or dividends, and then the shareholders pay taxes based on their individual tax brackets.

If the rental unit that you own is the only source of income for your corporation, then since you had a loss for the year, you would not be taxed at the corporate level since there was no profit for the year to tax.

The rental of real estate property is generally considered to be a passive activity. A loss from a passive activity is only allowed up to the extent of passive income. There are exceptions to this rule:

If you are considered to be a real estate professional under IRS definition, then your activity is not considered to be passive, and all of your losses are deductible in the year they occurred. In order to meet the definition of real estate professional, you must devote 50% or more of your time to your real estate activities and your must devote a minimum of 750 hours per year.

You may also qualify to deduct up to a maximum of $25,000 each year from rental losses if you actively participate in your rental activities and if your modified adjusted gross income is less than $150,000. In order to be considered as actively participating, you must actually take part in the decision making of how to manage your property. It does not mean that you have to physically take part in renting the unit or maintaining the unit, but you do have to take an active role in decisions regarding management of the property. If you meet the active participation rule, then you may deduct up to a maximum of $25,000 in losses in any one tax year. If your MAGI is $100,000 or less, then the entire $25,000 is allowed. If your MAGI is between $100,000 and $150,000, then your allowable deduction is reduced by $1.00 for every $2.00 your MAGI exceeds the $100,000 threshold. Once your MAGI reaches $150,000, the deduction is phased out entirely. Any losses which you have in excess of the $25,000 which you were not able to use, are then carried forward for use on future tax returns.

Since you indicated that your MAGI is over $150,000, then even if you actively participate in the management of this property, you would not be allowed to deduct any of your losses from this rental activity. You would, however, be able to carry those losses forward and use them on your future tax returns.

If you meet the definition of a real estate professional, then all of your losses would be allowed in the year they are incurred.

If this was helpful please press the Accept button. Positive feedback is also appreciated.

Thank you.
Customer: replied 5 years ago.

One more item for clarification, My wife manages the properties as her work. She does all the marketing and spent more than 50% of her time managing the property in term of the renovations, hiring of staff and coordination with the resort and prospective renters. She traveled to jamaica to oversee the property 8 to 10 times during the year. Would this qualify her as a real estate professional and therefore allow the losses?

 

In addition, I am responsible for our primary income and we file a joint tax return,

 

Wes

Expert:  Merlo replied 5 years ago.
Hello againCustomer

If you are married filing a joint return, then if either you or your spouse can individually meet the rules to qualify as a real estate professional, then all of your losses from the rental activity will be allowed.

In order for your wife to qualify, more than 50% of the services which she performs for any and all businesses must be directly related to your business of real estate. She also must perform a minimum of 750 hours per year in performing services for the real estate business. As long as either you or your wife meet these requirements, then you may deduct all of your losses from this rental activity.

Either you or your spouse must meet both of the above conditions without taking into account services performed by the other spouse. In other words, you cannot combine the time each of you spent to say that between the two of you, you spent more than 50% of your time and 750 hours on the real estate activity. The conditions must be met individually by either one or both spouses.

If this was helpful please press the Accept button. Positive feedback is also appreciated.

Thank you.


Customer: replied 5 years ago.

Two final questions;

 

First, does my wife have to have any specific real estate designations or licenses to meet the qualifications? She did spend more than 50% of her time given that she resigned her normal position to manage the development, renovations etc. but did not have any prior professional real estate experience or background?

 

Second, what forms would I need to complete to refect the rental real estate and is that form different from the form that I would need to file for the holding company (St Lucia S corp) that we own that in turn owns the property in jamaica.

 

Your responses have been very helpful so far and I think this will be the last questions I want to address to complete this process.

 

Thank You

Expert:  Merlo replied 5 years ago.
Hello againCustomer

First, your wife does not need to hold any special license or have any certain background to qualify as a real estate professional, as long as she spends the required time in managing the property.

As far as your tax returns, the S Corporation will file form 1120-S (Tax Return for S Corporation). There is no tax due with this form as all the tax will flow through to the shareholders (you and your wife) and be paid on your own personal return. But the 1120-S will report all the income and/or losses of the S Corporation. The S Corporation will also then issue K-1 forms to each partner to report each partner's share of income or loss from the S Corporation. You and your wife will then report the income or losses from your K-1 forms on your personal tax return, Form 1040.

If this is your first year preparing tax returns for your S Corporation, you will probably want to seek the help of tax consultant, at least for the first year. Once you have a record of the forms that need to be filed and see how they are filled in, you may then in future years be able to file your own returns and K-1 forms.

If this was helpful please press the Accept button. Positive feedback is also appreciated.

Thank you.

Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience: 25+ years tax consulting. Specializing in returns for US citizens living abroad
Merlo and other Tax Specialists are ready to help you
Customer: replied 5 years ago.

Merlo,

 

Thanks for your help on this. In doing more work, I've come to realize that the corporation is a Limited Liability company, so it's not a S corp. How does this change the answer you've previoulsy provided and what are the forms that I will need to complete?

Expert:  Merlo replied 5 years ago.
Hello againCustomer

If you and your wife are the only two members of your Limited Liability Company, and if the only business you have is from real estate rentals, then the IRS considers your LLC to be disregarded for tax purposes. What that means is that you will not need to file a separate tax return for the LLC itself.

The income and/or losses from your LLC will strictly be reported on the Form 1040 tax return that you file for you an your wife. No other return needs to be filed.

If this was helpful please press the Accept button. Positive feedback is also appreciated.

Thank you.
Customer: replied 5 years ago.

 

Does it make a difference that the LLC is registered in a foreign country?

Expert:  Merlo replied 5 years ago.
Hello againCustomer

The fact that the company is registered out of the country means that you have no reporting requirements in the US as far as filing a tax return for the company itself. You would just report the income that you and your wife have earned from this rental business on your personal tax returns.

If this was helpful please press the Accept button.

Thank you.
Customer: replied 5 years ago.
Will I need to indicate that there are is foreign income and expenses?
Expert:  Merlo replied 5 years ago.
Hello againCustomer

You do not need to indicate this is foreign income.

When you report your rental income, you will report this on Schedule E. Schedule E will ask you for the address of each property that you had rental income from, so the IRS will know where the property is located.

If this was helpful please press the Accept button.

Thank you.
Customer: replied 5 years ago.
One last question. Will I also need to complete schedule C to show other business expenses?

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