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Rental Earnings and Payments - Tips for Schedule E

The key to mastering the Schedule E would be to organize your income and expenses using a spreadsheet or personal finance software package. In my experience, clients who keep detailed summaries of their rental property expenses would be the ones who benefit the majority of at tax time in the generous tax rules concerning rental income.

Schedule E Tax Tips

Landlords need to maintain excellent records regarding price basis, income, and expenses. And the number 1 best way to keep track of all this? Set up a spreadsheet. Your tax accountant might even have a template you can use. As a landlord, here are the things you have to keep track of:

Purchase price of the house, condo, or apartment building you are renting out, Accumulated depreciation, and current annual depreciation on your property, Rental income, Security deposits you obtained. In addition, you will need to keep track of various expenses associated with your rental property, including:

Commissions or property administration fees, Advertising costs, Cleaning, maintenance, and repair costs, Homeowners insurance and HOA dues, Real estate taxes as well as mortgage interest expenses, Security deposits reimbursed to the tenant. and various other costs, such as utilities, landscaping, garbage, and so forth. As you can see, it will be particularly helpful if you track these various expenses using personal finance software or perhaps a computer spreadsheet, so that monthly and year-end reports could be quickly printed out.

Passive Activity Losses

Renting out real estate property is generally considered a passive activity, even if you devote a lot of time to selecting the right tenants, repairing the rental device, and inspecting the property for routine maintenance. What this means is how the IRS limits your losses from your rental business to a maximum of $25, 000 per year. The rules and criteria for Passive Activity Losses are found in IRS Instructions for Schedule E. Note: this is $25, 000 in total losses from all of your rental properties. Tax Planning for Landlords

Landlords normally make a small profit on their rental income. This is the case because rental income is generally sufficient to pay the mortgage, and plus a small extra for property taxation's, insurance, and repairs. However, landlords get to depreciate the purchase price of the rental property, which is usually sufficient to turn a small economic profit into a small tax loss. That means expenses exceed income after depreciation is taken into consideration. The IRS provides the tax break for homeowners who rent out their property instead of using the property as a individual residence. Every so often, however, landlords face major costs, such as replacing a roof, or gutting an apartment after a long-term tenant vacates. In these circumstances, it is possible how the landlord has a loss more than $25, 000. But the Passive Exercise Loss rules will limit the loss to exactly $25, 000. The remainder will be carried over to next year, when hopefully the landlord may have more of a profit and will be able to absorb the excess tax losses.

Selling Rental Properties

Selling a house, apartment building, or other rental property is different than selling your primary home. Different rules apply for calculating your taxes. Just like calculating funds gains, the formula for calculating the gain or loss of rental property involves subtracting your cost basis from your selling price. Adjusted Cost Basis with regard to Rental Property

The formula for calculating your cost basis on rental property is as follows: Purchase price + Purchase costs (title & escrow fees, real estate agent commissions, etc.) + Improvements (changing the roof, new furnace, etc.) + Selling costs (name & escrow fees, real estate agent profits, etc.) - Accumulated depreciation (as reported in your tax forms) = Cost Basis And then calculating your own profit or loss would be:

Selling price - Cost Basis = Gain or Reduction If the resulting number is positive, you made a profit when you sold your rental property. If the resulting number is negative, you incurred a loss when you sold your rental home. Gains on rental property can be taxed partly as depreciation recapture at a maximum 25% tax price and partly as funds gains. This is due to rules for rental property contained in the Internal Revenue Code Section 1250, which is discussed within IRS Publication 544. Rental property sales are reported on Form 4797, and any capital obtain calculations are reported on Schedule D.

Real Property and Limited Liability

Many clients have asked me about forming companies, limited liability companies and partnerships to possess their rental properties. A real estate attorney is really the best person in order to ask such questions. But here's the tax perspective. A corporation might be disadvantageous, since corporations do not have a preferred tax rate on long-term capital gains. A limited liability company could pass through long-term increases to its members, and so gains it's still eligible for the preferred 15% rate on long-term gains. Landlords should discuss this and other legal aspects of forming a business for rental properties with an attorney to get a grasp of all the actual legal and financial implications of such a strategy.

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