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I bought a 4 bedroom 2,200 sq. ft. house in November for 190k.

Customer Question
Title is joint with my...
I bought a 4 bedroom 2,200 sq. ft. house in November for 190k. Title is joint with my wife. 20 percent down, 30yr fixed mortgage. Monthly payment including mortgage, taxes, insurance is 1,279. It appraised at 215k with a 7.5k deduction for poor condition. I spent 30K fixing it up (carpets, landscaping, gutters, paint, bathroom tile, etc).

My college-age daughter lives there with two roommates each paying 500/month rent. Everyone has full equal access to the entire house.

How do I report this on my 2009 and 2010 taxes? Schedule A or E or both? Is this a personal home or a rental property? Is the 30k fix-up and expense in 2009 or an addition to the cost basis for depreciation? Do I need to prorate between personal use and rental and if so do I count 3/4 (bedrooms) as rental 2/3 (people) as rental or just the size of the rental bedrooms?

Do I need to form an LLC to own the house? Do I need renters insurance in addition to homeowners insurance?

Thanks

Al
Submitted: 7 years ago.Category: Tax
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2/1/2010
Tax Professional: Chad Oberg, Certified Public Accountant (CPA) replied 7 years ago
Chad Oberg
Chad Oberg, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 174
Experience: 10 + years of accounting and tax experience, financial statements and business planning
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Customer,

 

You are now the proud owner of a rental home which is reported on Schedule E page 1. All the expenses including interest, depreciation and property tax for this property will reflect on Schedule E.

 

The additional cost to fix up the property will be capitalized and depreciated over 27.5 years. If there were items in the house that were fixed as regular repairs or were minor amounts, you can categorize them as repairs expense on Line 14 of Schedule E.

 

It is not a personal home.

 

You do not need to prorate between personal use and rental since it is 100% rental.

 

Renters insurance is always a good idea. However, I would recommend discussing you options with your insurance agent to determine the best plan that fits your needs.

 

You do not have to have an LLC to have a rental property. The LLC does provide some protection to you personally. However, with only one property, you may want to consider an Umbrella Insurance Policy to mitigate some of the risks. This is another discussion to have with the insurance agent. Note: LLC's are great, however they do cost more to set-up and maintain (i.e. filing requirements).

 

You should file a tax return in Mississippi due to the rental property. However, keep in mind that by the time you pay all the expenses, you will probably have a break-even/loss scenario. Review the Schedule E for all the different types of expenses and there is also the other deductions section at the bottom. This is usual after depreciation.

 

If you have any questions, please do not hesitate to contact me.

 

Regards,

 

Chad

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Customer reply replied 7 years ago
Thanks Chad, very helpful. A couple of clarifications.

  1. What criteria do I use to determine what repairs/enhancements should be depreciated and which should be expensed?
  2. To be crystal clear, My college age daughter is my dependent and claimed on my tax returns and does not make a rent payment. Does that make a difference?
Al
Tax Professional: Chad Oberg, Certified Public Accountant (CPA) replied 7 years ago

This is one of those areas that are not so clear in the code. What many of my clients do is make a policy that any expense for repairs/replacement or maintenance that are over a certain dollar limit (say $500) are capitalized while the amounts under that are expensed. If you capitalize everything, it becomes a record keeping nightmare. The other test that you would apply is if the work done is totally replacing items (say carpet) which would be capitalized or fixing a faucet which would be expensed.

 

From my understanding of the first message, your daughter was paying rent also.

 

If you have her pay in market rents $500, you could take more of the deductions at the rental level. How she received the $500 per month to pay the rent is up to you. A gift would not result in any reporting issues since it is under the yearly limit. If you do this I would run two separate rental properties on Schedule E. One as the regular rental and the other as the related party portion and indicate related party in the software. This will cause any losses associated with the related party to be suspended on this portion of the rental. You could also increase her rent or your gift to keep her portion from having a loss.

 

Or you could allocate a portion of the expenses off the rentals and take part of the interest expense and property taxes on the Schedule A. This gets a bit more messy and hard to track.

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Customer reply replied 7 years ago
Chad,

Sorry for the time delay in getting back to you. Thanks so much for the good advice above.

However I don't understand the process of gifting money to my daughter for her to pay me rent which I offset with rental expenses and end up paying no taxes on the income. Seems like a circle that gets me back where I started. If she pays no rent there is no income to deal with.

Also, it turns out that I make too much money. My MAGI is above $150,000. If I understand the rules I can only take Schedule E deductions up to the rent income amount even from the other tenants and cannot use the additional rental expenses to offset my other income. So it seems that I should keep as much of the property as possible as personal use so I can deduct the mortgage interest and taxes on Schedule A. That is to say, concider my daughter's use as my personal use and only allocate enough of the property expenses to her rent paying roomates to cover their rent checks.

Do you agree?

Al
Customer reply replied 7 years ago
Anybody out there?
Tax Professional: Chad Oberg, Certified Public Accountant (CPA) replied 7 years ago

 

Al,

 

See page 13 of the attachment below:

 

http://www.irs.gov/pub/irs-pdf/p527.pdf

 

You are limited to $25,000 losses.

 

The only area you need to be careful with is not creating losses with related parties (daughter) since this is not allowed.

 

Regards,

 

Chad

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Customer reply replied 7 years ago
As I read pages 13 and 14 of Pub 527 I am not elegible for the $25,000 in loses because I make over $150,000 MAGI. Am I misreading something?

Al
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