Taxes and Rental Property

If you got to the beach this summer, you probably noticed those huge vacation homes lining the shore line. Owners rent them out for the season, or by the week or month. Some property owners rent houses or apartments year-round. Others rent out an extra bedroom or their basement for extra money.

 

Renting out a residence, such as a summer vacation home, when you are not using it, or a portion of your home, you may be eligible to deduct expenses against the rental income. You might even be able to deduct expenses in excess of the rental income and claim a loss that can offset other income. Sounds great; as long as you qualify based on the tax rules and limits.

 

Four rental property tax rules and limits that you need to know:

 

  1. Rental Days Personal Days

You cannot claim a tax loss on a rental property for the year if you use it personally for 14 days, or 10 percent of days the home is rented out, whichever is greater. In that case, you can only deduct rental expenses up to the amount of rental income. Exception — a day spent making repairs or improvements do not count as a personal day if you have the records to back it up.

 

  1. Deductible Expenses

In general, income from a rental property is taxable. Deductions from that income can be taken for expenses related to the rental, such as mortgage interest, property taxes, insurance, repairs, and utilities. If you are renting out your basement or some other portion of your home, expenses related to the rental portion can be allocated to offset rental income. Direct rental expenses, such as painting or repairing the rented portion, can be 100% deducted.

 

  1. At-Risk and Passive Activity Limits

The deductible portion of losses from rental real estate activity may be limited under two sets of rules: at-risk rules and passive activity limits. These rules apply if you are not at risk of loss for a property placed in service after 1986 that is operated as a passive activity. In most cases, real estate rental activities are considered to be passive. There are exceptions, but these rules can limit deductible losses.

 

  1. Depreciation

The cost of income-producing property can be deducted yearly by depreciating the property. The amount of depreciation deduction is determined by basis in the property used as a rental, the recovery period established by IRS rules, and the depreciation method used. Depreciation reduces the property’s basis for figuring gain or loss upon sale or exchange.

 

So if you plan to rent out your vacation property or your basement, you need to know the rules and limitations. Get more details about the tax rules and limits for your rental property from the IRS at https://www.irs.gov/pub/irs-pdf/p527.pdf

Are Legal Fees Tax Deductible?

The answer is—it depends! Generally, it depends on the nature of the expense. Legal expenses incurred for business purposes are generally deductible as ‘ordinary and necessary’ expenses of the business entity. Most legal fees paid for personal reasons are not deductible, but some exceptions exist.

 

Some relatively common situations exist where non-business legal fees may be deductible. These situations relate to doing or keeping a job, collecting taxable income, or getting tax advice. As always, details matter. The rules that apply and how to report can get pretty complicated.

 

Legal Expenses that May be Deducted are generally related to business, employment/income, and income taxes, such as:

  1. Legal expenses incurred in attempting to produce or collect taxable income, or paid in connection with the determination, collection, or refund of any tax.
  2. Related to either doing or keeping a job, such as legal fees paid related to a claim of unlawful discrimination.
  3. Tax advice related to a divorce if the fees are billed specifically for tax advice, determined in a reasonable way.
  4. To collect taxable alimony.
  5. To resolve individual tax issues relating to profit or loss from business, rentals or royalties, or farm income.

 

Legal Expenses that May Not be Deducted are generally related to personal legal needs, such as:

  1. Preparation of a will.
  2. Property claims or property settlement in a divorce.
  3. Custody of children.
  4. Civil or criminal charges resulting from a personal relationship.
  5. Damages for personal injury, other than for certain whistleblower and unlawful discrimination claims.

 

This list of situations highlights the importance of understanding the rules about which legal fees are tax deductible and which are not.  While the details of what’s going on aren’t under your control, you can control obtaining the documentation needed for those tax deductible legal fees.

 

Want to know more? This topic is so complicated, it’s addressed in four separate IRS publications: Tax Guide for Small Business, Publication 334, http://bit.ly/2sCks0Z; Miscellaneous Deductions, Publication 529, http://bit.ly/2tHPiom; Business Expenses, Publication 535, http://bit.ly/2pkyRwT; and Basis of Assets, Publication 551, http://bit.ly/2tF2c6X.

Itemize or Standard Deduction – Which One is Better?

This time of year, there’s a lot of tax talk at home, at work, and on TV. Some of that talk centers on whether taxpayers should “itemize” or take the “standard deduction.”  Knowing the difference and which is better is important for keeping that tax bill as low as possible.

 

Taxpayers can itemize or take the standard deduction. Not both. Knowing how to choose comes down to these three points:

 

  1. Filing Status and Age

The standard deduction amount varies based on filing status and age. Amounts are indexed annually for inflation. For 2016, the standard deduction for a person who is single or married filing separately, and is under age 65 is $6,300. Single taxpayers age 65 and over get a $7,850 standard deduction. For married couples filing jointly, it’s $12,600.

 

  1. Getting the Most Tax Savings

Itemize deductions when the total exceeds the standard deduction. Itemized deductions include amounts paid during the year for state and local income or sales taxes, real estate taxes, personal property taxes, mortgage interest, gifts to charity, uninsured losses, and, depending on the situation, medical and dental expenses.

 

  1. Qualifying for the Standard Deduction

Some situations prevent taxpayers from using the standard deduction. For example, a married person filing separately from her spouse who itemizes cannot select the standard deduction, even if it’s higher than itemizing. Nonresident aliens, dual-citizen aliens, estates, trusts, and partnerships also do not qualify to take the standard deduction.

 

As usual, there’s much more to this topic than space allows here. Taxes are complicated. Consult a qualified tax professional for personalized assistance.

 

Need help choosing on your own? The IRS website has “Six Steps to Help You Choose” at: http://bit.ly/2mc4Exr