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I recently was accepted to grad school at West Virginia University

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and moved from my Austin...
I recently was accepted to grad school at West Virginia University and moved from my Austin, TX home at the end of May; I have an intent to return after two-three years. I decided to rent my house out to 3 guys. One of the guys, a friend I trust, manages the house for $100 discount off his rent. I pay all HOA fees, Utility Bills, and Trash. The combined rent pretty much covers my mortgage cost and utilities; not a lot of profit if any. IN the past I received a MCC credit, its a local credit that the city of Austin offers for first time home buyers with good credit; I'm assuming I won't be able to use this even though I still claim my Austin home as my permanent address, but I'm not occupying at this time? I also changed my home insurance policy on the home to a renters insurance policy. I've been doing a lot of research, but it seems difficult to wrap my head around all the tax options, so I purchased the program Quicken Rental Property and Personal Finances software which can help me organize everything which is compatible with my Turbo Tax. I know this is a lot of information, but I just wanted to provide you with all the background information so you can better advise me. I guess I just want to make sure I prepare myself for next years tax time and what I should be doing now to prepare for taxes on my given situation. Also maybe I should mention, I am working part-time in Pittsburgh, PA, but not a lot of income from that job, just extra spending cash; that should make things interesting since I live in West Virgina perhaps? Can you help?
Submitted: 6 years ago.Category: Tax
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Answered in 28 minutes by:
8/19/2011
Tax Professional: Lev, Tax Advisor replied 6 years ago
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 30,724
Experience: Taxes, Immigration, Labor Relations
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LEV :

Hi and welcome to Just Answer!
Your rental activities will be reported on the schedule E - http://www.irs.gov/pub/irs-pdf/f1040se.pdf


Report rental income on your return for the year you actually or constructively receive it, if you are a cash basis taxpayer. You are a cash basis taxpayer if you report income in the year you receive it, regardless of when it was earned. You constructively receive income when it is made available to you, for example, by being credited to your bank account.


Advance rent is any amount you receive before the period that it covers. Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use.


Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year.


If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Include it in your income when you receive it.


If your tenant pays any of your expenses, the payments are rental income. You must include them in your income. You can deduct the expenses if they are deductible rental expenses. See Rental Expenses in Publication 527, for more information - www.irs.gov/pub/irs-pdf/p527.pdf


Some examples of expenses that may be deducted from your total rental income are:



  • Depreciation You begin to depreciate your rental property when you place it in service. You can recover some or all of your original acquisition cost and improvements by using Form 4562 (to report depreciation) beginning in the year your rental property is first placed in service, and beginning in any year you make improvements or add furnishings.

  • Repairs– Repairs just keep your property in good working condition but do not add to the value of the property.

  • Operating Expenses

  • Uncollected rents– If you are a cash basis taxpayer, you cannot deduct uncollected rents as an expense because you have not included those rents in income.
    Your net rental income / loss is reported on your tax return - form 1040 - http://www.irs.gov/pub/irs-pdf/f1040.pdf - for 2010 that is on the line 17. If you have a small loss and your other taxable income is not large - you may use that loss to offset other taxable income.
    Let me know if you need any help.

Customer:

I am able to deduct mortgage interest and insurance premiums too right, but I would need to divide the time when it was living there and when it transitioned to a rental correct? Also, do you know if I will be able to use the local credit, I believe its called a Mortgage Credit Certificate (MCC)? Also, how will my income from my regular job come into play and will my credits I'm elegible for by going to school and the school loans I carry; can these help decrease what I will owe in taxes? On a final note, I was considering installing a solar system on the home using a local rebate that is at a $3/ watt installed; I would also be able to use the 30% federal tax credit on this too right? Thanks for getting me straight on all of this.

LEV :

Yes - you are correct - because the property was converted from personal to rental - you need to deduct only expenses related to rental activity - including mortgage interest, real estate taxes, insurance, etc.
A mortgage credit certificate program is a state program designed to help make ownership of new and existing homes more affordable for individuals and families of low and moderate income, especially first time buyers. A Mortgage Credit Certificate allows the homebuyer to claim a tax credit for some portion of the mortgage interest paid per year. It is a dollar for dollar reduction against their federal tax liability.
Here is the form to use - http://www.irs.gov/pub/irs-pdf/f8396.pdf.
To be eligible - you should use the home as their principal/primary residence - because the property is converted to rental - you are not eligible for MCC. Please contact TDHCA for additional information(NNN) NNN-NNNN

LEV :

For solar systems - see requirements here - http://www.energystar.gov/index.cfm?c=tax_credits.tx_index
Credit Details: 30% of the cost, up to $500 per .5 kW of power capacity. Rentals and second homes do not qualify. Instead - you should add the cost to the basis and depreciate.
You still may deduct educational expenses. However if you will benefit from these deductions and credits depends on your total taxable income and tax liability. These are not refundable credits - so - if you do not have any tax liability - you will not have any benefits from credits.

Customer:

Thank you for all of your help; I'll go ahead and call TDHCA. I'll let you know if I have anymore questions.

Lev
Lev, Tax Advisor
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Satisfied Customers: 30,724
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