Rental Property Proper Classification and Reporting The Expert in Tax Education
Rental Property Developed by Timothy Dilworth EA, CPA, NTPI Fellow Presented by XXXX Summer 2014 The Expert in Tax Education
Residential Rental Property Mixed Use Home Personal Use Rental Property Dwelling Unit used as a home Rental Property with active participation Short-term Rental with material participation Substantial services provided in conjunction with rental Qualified Joint Venture Partnership LLC Corporation (S- or C-) Self Rental
Mixed Use Property Personal Use Property 15 days or more of personal use Rented < 15 days Income not reported Allowed Expenses – Schedule A Rental Property Personal use less than greater of 14 days or 10% of days rented at FMV Rental income on Schedule E Allowed expenses allocated between Schedule A and E Dwelling Unit Used as Home Personal Use more than greater of 14 days or 10% of days rented at FMV Rental income on Schedule E Allowed expenses allocated between Schedules A and E Other indirect expenses cannot create a loss
Tax Court Method Interest and taxes allocated based on rental days divided by entire year (365) Maintenance and other direct expenses allocated by days occupied – rental vs. personal Bolton, 51 AFTR 2d 83-305 (9 th Cir. 1982) Mortgage interest only allowed on qualified personal residence – first and/or second home. Property taxes are allowed on all properties owned by a taxpayer. Schedule E gain vs. loss
Deductibility of Losses Passive Loss Limitations – Form 8582 Most rental activities are passive – income received mainly for use of tangible property rather than for services Rental activity with active participation allowed limited loss per year. Disallowed amounts carried over to be used in future year or when property sold Basis Limitations – Basis worksheet Losses not allowed beyond taxpayer’s basis in the property At Risk Limitations - Form 6198 You may be subject to the at-risk rules if you have: A loss from an activity carried on as a trade or business or for the production of income, and Amounts invested in the activity for which you are not fully at risk.
Active Participation Active participation. You actively participated in a rental real estate activity if you (and your spouse) owned at least 10% of the rental property and you made management decisions or arranged for others to provide services (such as repairs) in a significant and bona fide sense. Management decisions that may count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and other similar decisions.
Maximum Special Allowance Must have active participation $25,000 for Single, Head of Household and MFJ filers $12,500 for MFS filers AGI must be less than 100,000 or less than 50,000 for MFS Loss limited to 50% of difference between 150,000 and MAGI (75,000 for MFS) Unused amounts carried over on Form 8582 Carryovers used when less than MSA created in current year or if income drops allowing losses previously limited by MAGI
Real Estate Professionals More than 50% of their personal services during the tax year are performed in real property trades or businesses in which they materially participate. And, they spend more than 750 hours of service during the year in real property trades or businesses in which they materially participate. For purposes of material participation, each activity is considered separately, unless: The taxpayer elects to treat all interests in rental real estate as one activity.
Material Participation An activity is not passive if you participate materially Material participation tests >500 hrs of participation Your participation was substantially all the participation of all individuals for the tax year, including that of individuals with no ownership interest. You participated more than 100 hrs and at least as much as any other individual, including others with no ownership interest. The activity is a significant participation activity and you participated in all significant participation activities for more than 500 hours. You materially participated in the activity for any 5 of the 10 previous years. The activity is a personal service activity in which you materially participated for any 3 preceding tax years. Based on all facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year (>100 hrs).
Documentation Keep mileage logs – Where have we heard this before! Keep log of days and hours worked by taxpayer and others (including spouse) Separate logs for each property and consolidated log (each property considered separately for material participation, unless you elect to consolidate. Log time spent at rental doing work on property vs. personal time Keep records back at least 10 years
Rental Activities not automatically treated as Passive Average rental period of 7 days or less Average period of rental is 30 days or less and you provide significant personal services You provide extraordinary personal services in making the rental property available for customer use The rental is incidental to a non-rental activity You customarily make the rental property available during defined business hours for nonexclusive use by various customers You provide the property for use in a non-rental activity in your capacity as an owner of an interest in the partnership, S-Corp, and joint venture conducting that activity
Passive vs. Active and Self Rentals Note that losses from Passive activities cannot offset income from non- passive activities Temp. Regs. Sec. 1.469-2T(f)(6) provides that an amount of the taxpayer's gross rental activity income for the tax year from an item of property equal to the net rental activity income for the year from that item of property is treated as not from a passive activity if the property is: Rented for use in a trade or business activity in which the taxpayer materially participates for the tax year; and Is not described in Temp. Regs. Sec. 1.469-2T(f)(5), covering property rented incidental to a development activity. Under the self-rental rule, the rental losses are still considered to be passive losses deductible only to the extent of passive income, while the income is treated as "active income" (Carlos, 123 TC 275 (2004)). Thus losses from the self rental can only offset income from that same activity Additionally, income from the self rental cannot be offset by passive losses from other rental activities.
Presentation developed by Timothy Dilworth, EA, CPA, NTPI Fellow Timothy Dilworth EA, CPA and an NTPI Fellow has been the tax manager at a CPA firm in Michigan for the past 7 years. He has been teaching tax classes in Michigan for 10 years and served as Education chair for the Michigan Society of Enrolled Agents for 4 years. Dilworth served on the NTPI Planning Committee for the past two years, is the Immediate Past President of MiSEA, and is currently serving on the NAEA Board of Directors.
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