Rental Property and Taxes Question

[EvrClrx311]

My Google searching has failed me on this one, so has the CPA from TurboTax Live. I don't think my situation is very unusual though, and I'm sure this is something people here may have dealt with who have had real estate investment (rental properties) so I thought I'd ask, even if most here aren't dealing with W4... you may have in the past. Thanks in advance!

I was just married in late 2019, and my wife and I combined our finances and bought a new home. We both kept our other houses. So we now have three properties, and are renting out two (one is already rented, the other will start next month). The annual mortgage interest we pay on the two rentals will be in the neighborhood of ($15,600) and ($7,500) property taxes on each will be ($3,000) and ($1,000). Also for tax purposes the depreciation on them is ($13,454) and ($6,363). So we will obviously be itemizing deductions.

It's my understanding that the mortgage interest and prop taxes basically reduces the amount of income we report from the rental payments we receive.

I'm currently filling out (updating) my W4 to account for married life, and the fact that we will have a rather large itemized deduction amount moving forward (to include these rentals). However, should I be using the mortgage interest and property taxes values on the W4 worksheet to compute my withholding figure? Or should I not include those? On one hand it seems that since that tax benefit is simply reducing the income reporting of the rental income, that it shouldn't impact my job's withholding on my W4... but on the other, the W4 is asking for me to include "other" deductions I plan to take. So I'm lost on whether to include it or not?

[pb4uski]

Quote:

Originally Posted by EvrClrx311 ....So we will obviously be itemizing deductions. ...

Not necessarily. The rent, mortgage interest, property taxes and depreciation of the two rent houses will be reported together on Schedule E, Rental Income.

For itemizing deductions, you'll include mortgage interest and property taxes on your personal residence... so you may be better off using the standard deduction (most people are).

[Sunset]

OP - pb4uski is correct.

Another way to think of it is that the rentals are like a business (has income, expenses, depreciation) which results in a net income or loss.
That (net income or loss) is then transferred to your personal income situation.

OP - perhaps you left out rental expenses just to make your question simpler ??

[EvrClrx311]

Ah, ok... The mention of Schedule E sent me down the right path! And the description of it like a business is very helpful.

So basically, I fill out a form (Schedule E) that comes up with a total profit or loss, which is then applied to my taxes for purposes of deduction or more tax liability. In my situation each of the houses will be a loss (not from a monthly cash flow perspective, but when factoring in the depreciation and rest), so I'm assuming then that value is what I should consider as I evaluate how this impacts my total tax liability for withholding purposes?

This makes much more sense now -- thanks guy!

[Starsky]

Quote:

Originally Posted by pb4uski Not necessarily. The rent, mortgage interest, property taxes and depreciation of the two rent houses will be reported together on Schedule E, Rental Income. For itemizing deductions, you'll include mortgage interest and property taxes on your personal residence... so you may be better off using the standard deduction (most people are).

This...

Your rentals are a passive business activity, and will be itemized in a separate Schedule than your W2 income. It is handled in Schedule E and in Schedule 1 (1040), Line 17. Depreciation is entered using Form 4562 and carried over to Schedule E as a deduction. If this is your first time reporting this, you will need to choose the depreciation method for your property - a one-time choice. You should consult an accountant. She can get you off on the right foot and show you what to do. Well worth the expense, especially in a partial income year.

The W4 deductions you are referring to in Step 4 are completely optional, and allow you to adjust your job withholding to account for other potential deductions (like an additional dependent) or additional taxes you might owe to the IRS from other activities. (I imagine you could use it to lower your quarterly estimated taxes on the real estate profit, but IMO it would be far preferable to handle that separately with rent proceeds. Since this is year 1, you haven't had to do that yet.)

[cathy63]

The amount of loss you can claim on schedule E is limited if you and your spouse have combined income of more than $150K from other sources. The best way to get an idea of what you'll see next year is to go ahead and do a new tax return using the 2019 software but enter all the numbers as if it were the end of 2020. Then take a look at line 5 of Schedule 1. That's the actual gain or loss you should take into account when figuring your new W-4 withholding.

If you do have losses that you aren't able to use this year, then those get carried over on form 8582. Also, if you are subject to AMT (which many fewer people are since the 2017 TCJA passed), your ability to use your real estate losses is limited even further.

[Luck_Club]

Point of interest you might want to enter into your calculations. You can take any gain on your primary residence tax free if you lived in the house in 2 of the last 5 years. So you can sell it up to the 3rd year and gains would be tax free, but you will need to recapture the depreciation against your current income at the time.

Things to consider.

[kaneohe]

Quote:

Originally Posted by cathy63 The amount of loss you can claim on schedule E is limited if you and your spouse have combined income of more than $150K from other sources. .................................

limited to 0?

[wolf]

OP: Don't forget to check out, QUALIFIED BUSINESS INCOME DEDUCTION.

Let's you reduce your Rental Income by 20%. There is a worksheet fill out.

and rules to follow. I heard for 2019 tax year, IRS, requires more documentation?

Just an observation. You might be better off, having a CPA/equivalent, do this years
return. And ask, how to set up depreciation schedule. (based on your original post)

Depending on repairs made. ie. House, roof, furnance, ...depreciated for longer term. Appliances, for shorter term....ie. 7 yrs....

What is the basis for depreciation? Land is not counted.

After you rent out houses, do you know how to depreciate appliances purchased?
What" macrs" tables to use. (or currently, you can write off entire amt. current year).

Just throwing out things to think about, if you understand, then you can do yourself.

If not, maybe, IMHO, first year, hire a pro. Good luck.

[cathy63]

Quote:

Originally Posted by kaneohe limited to 0?

Yes I should have looked it up instead of relying on memory. The phase out begins at $100K and goes to zero at $150K.

[EvrClrx311]

Thanks again for all the info, I think I will contact a CPA for this first year. We have some complex things going on... currently around $25K in repairs happening to one of the houses before it starts to rent next month, and it sits on 5 acres, so I assume about half of the value of the home is the land and not the home itself... which will no doubt impact the depreciation math.

Quote:

Originally Posted by cathy63 Yes I should have looked it up instead of relying on memory. The phase out begins at $100K and goes to zero at $150K.

So if our combined income is above $150K that means I should assume that none of the losses from rental income (Schedule E) can be carried over to 1040?

[Toocold]

On depreciation, you should consider the date of service which will impact your calculations for year 1.

I would definitely leverage a CPA here for the first year.

[cathy63]

Quote:

Originally Posted by EvrClrx311 So if our combined income is above $150K that means I should assume that none of the losses from rental income (Schedule E) can be carried over to 1040?

Best to do a tax return and see what happens. I think you end up with $0 on the 1040, and the losses carry over until you have a low income year and can use them up (or maybe until you sell the property.)

[MichealKnight]

Quote:

Originally Posted by wolf OP: Don't forget to check out, QUALIFIED BUSINESS INCOME DEDUCTION. Let's you reduce your Rental Income by 20%. There is a worksheet fill out. and rules to follow. I heard for 2019 tax year, IRS, requires more documentation? Just an observation. You might be better off, having a CPA/equivalent, do this years return. And ask, how to set up depreciation schedule. (based on your original post) Depending on repairs made. ie. House, roof, furnance, ...depreciated for longer term. Appliances, for shorter term....ie. 7 yrs.... What is the basis for depreciation? Land is not counted. After you rent out houses, do you know how to depreciate appliances purchased? What" macrs" tables to use. (or currently, you can write off entire amt. current year). Just throwing out things to think about, if you understand, then you can do yourself. If not, maybe, IMHO, first year, hire a pro. Good luck.

YES! The 20% perk is real. I am also weighing how much to use that if I do early-retire in the next 12 months (age 45). 2 points....

1.)If I take the 20% perk - I will do so NOT as part of my master plan - because I feel this tax benefit is political, and therefore can be enhanced - or cancelled as new tax plans and deals are struck in the future.


2.)While MANY LLCs and Landlords are indeed taking advantage of this "Pass thru" rule that exempts $20,000 in income....the IRS states that you need to document 250 hours per year that you or someone else did on behalf of your real estate business. Sadly - trips to and from the property don't count.

Anything from advertising, bookkeeping, research, calling plumbers, inspecting work, etc can count.

Sort of a decision between you and your CPA if you will document 250 real hours...OR if you and CPA feel some amount of creativity and exagerration save the day.

[Sunset]

250 hours is 6 1/4 weeks of full-time work, that is a huge amount of time for a small landlord.

[wolf]

[QUOTE=EvrClrx311;2362788]Thanks again for all the info, I think I will contact a CPA for this first year. We have some complex things going on... currently around $25K in repairs happening to one of the houses before it starts to rent next month, and it sits on 5 acres, so I assume about half of the value of the home is the land and not the home itself... which will no doubt impact the depreciation math.


Yep, be sure and use a CPA/equivalent. No, you do not figure basis of house that way. (1/2 land, 1/2 building).

Various ways of determining basis. Here in Calif, you can use property tax bill to determine what the "split" is, House/Land. IRS, accepts this.

There are other methods. So long as you can "justify". Get a good accountant. (Higher the basis, the more depreciation expense). Higher the risk for audit, if you go over board.

Lots of good responses on this site, as many of us are long time landlords.

Take advantage of people willing to share their knowledge.

Good luck.

[wolf]

Quote:

Originally Posted by Sunset 250 hours is 6 1/4 weeks of full-time work, that is a huge amount of time for a small landlord.

Agree, but OP, mentioned they are going to do, I think, $25K, in repairs.
(that might take 250 hours). Which involves, hiring subs, checking on work,
hire CPA, collect data, receipts, etc........

Depends how aggressive you want to be. Just preparing tax returns for rental property takes time. (and how slow or fast you are ha.).

I figure, worst case, You are audited. You can try and prove your case.
If you lose, You pay penalties and additional tax.

Being audited by IRS, not really a big deal. Just a pain to try and justify
your deductions. No one goes to jail or anything.

[Offgrid Organic Farmer]

Quote:

Originally Posted by EvrClrx311 ... However, should I be using the mortgage interest and property taxes values on the W4 worksheet to compute my withholding figure? Or should I not include those? On one hand it seems that since that tax benefit is simply reducing the income reporting of the rental income, that it shouldn't impact my job's withholding on my W4... but on the other, the W4 is asking for me to include "other" deductions I plan to take. So I'm lost on whether to include it or not?

I would wait a year before changing your W4.

Lets see how your tax filing looks a year from now.

I have owned rental real estate since 1985. In our case, the rental income paid for the rentals, but it never gave us income beyond the write-offs.

The real benefit of having rental real estate [for us] was the accumulation of equity.

Which we were able to cash-out when I retired.

[EvrClrx311]

Lots of great information here... greatly appreciated! I love learning and gathering information from others experiences. I will definitely see a CPA this year, but like many others here... even if I know nothing about a situation, my intent is always to dive deep into it to try and do it myself. So this is really helpful!!

Quote:

Originally Posted by Sunset 250 hours is 6 1/4 weeks of full-time work, that is a huge amount of time for a small landlord.

Another way to look at it would be that this requires approximately 1 hour a day M-F all year worth of work (minus two weeks off for vacation)...

So I assume that if someone has 5+ houses, and work orders or management company involvement on a somewhat regular basis this can be accounted for. I think in our situation, it definitely wouldn't apply... I would have to exaggerate or stretch my involvement quite a bit to get to 250 hours a year on two properties.

That said, one of the properties is lots of land and a smaller house... our intent with it is to rent to someone who wants to have horses (or try out having horses) without actually fully committing yet to having their own place - it's already set up for that with a barn and fencing. Sounds like there is a pretty good market for that locally (we are in the DC suburbs), where rural, politics, and massive growth in population are all merging. Some like to get outside the city 25 miles and have land and farm like living.

When I stop working, my intent is to offer to mow/bushhog the land, which could account for some of that labor 250 hours. This is something I just enjoy doing that won't be for another 5-10 years though.

[Octogirl]

+1 as I start work on taxes this weekend.