Author Topic: Tax Deductions on Rental  (Read 626 times)

maz_phil

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Tax Deductions on Rental
« on: November 01, 2018, 09:38:51 AM »
Hello Mustachians,

My parents and I went in on rental property 40%-60%. I make under $100k and they have a combined income of over $150k. My name is not on the title/deed of the home due to a housing option I am attempting to pursue locally. We are looking to put 30-40k of repairs into the home as well as the necessary upkeep on the property. If we establish an LLC, is there a means by which I can write off the repair losses on this rental unit for my taxes even though the home is not in my name? While my parents do not qualify, I would and would it be possible to get the tax benefits if I set up the LLC as my business or some other method? Thank you all for your help!

-Maz_Phil

waltworks

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Re: Tax Deductions on Rental
« Reply #1 on: November 01, 2018, 10:02:59 AM »
If you're not on the title, you are pretty much screwed there.

Why do you say your parents don't qualify to write off expenses? Capital improvements will get depreciated (subtracted from rental income at tax time) and ongoing repairs/maintenance are all deducted from rental income as well. You do NOT just write off $10k worth of replacing the roof and call it a loss, if that's what you're suggesting.

Your total taxable income has nothing to do with it, your parents get to deduct those costs just like you would (if you were the legal owner).

-W

maz_phil

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Re: Tax Deductions on Rental
« Reply #2 on: November 01, 2018, 11:35:39 AM »
If you're not on the title, you are pretty much screwed there.

Why do you say your parents don't qualify to write off expenses? Capital improvements will get depreciated (subtracted from rental income at tax time) and ongoing repairs/maintenance are all deducted from rental income as well. You do NOT just write off $10k worth of replacing the roof and call it a loss, if that's what you're suggesting.

Your total taxable income has nothing to do with it, your parents get to deduct those costs just like you would (if you were the legal owner).

-W
Waltworks,

Thanks for the reply. i was under the assumption that the rental property could be treated as a business, and that losses on the property are only tax deductible when the household income is under $150k. Is this not correct?

bacchi

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Re: Tax Deductions on Rental
« Reply #3 on: November 01, 2018, 12:03:57 PM »
In the past, I shared several properties with another owner but the deeds only had one owner listed. We just combined the mortgage 1099s and expenses and split them. In effect, we were simply an unregistered partnership.

This survived an individual audit; though the audit wasn't focused on real estate (the flag/focus was stock options), the IRS did look at it.

You need to ask a CPA. At best, you'd be able to use 40% of the repairs/improvements on your Schedule E.

waltworks

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Re: Tax Deductions on Rental
« Reply #4 on: November 01, 2018, 02:27:16 PM »
Waltworks,

Thanks for the reply. i was under the assumption that the rental property could be treated as a business, and that losses on the property are only tax deductible when the household income is under $150k. Is this not correct?

I don't have an answer for you there, but how much money are you actually losing here? If you're spending $40k on capital improvements/repairs, that's only going to "cost" you $1200 a year or so in depreciation. The rental will still be making money for tax purposes, unless you have a really terrible rental to begin with.

-W

Lucky Recardito

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Re: Tax Deductions on Rental
« Reply #5 on: November 01, 2018, 02:43:06 PM »
Thanks for the reply. i was under the assumption that the rental property could be treated as a business, and that losses on the property are only tax deductible when the household income is under $150k. Is this not correct?

Your parents, no matter their income, can always deduct rental expenses from rental income. For many small rental "businesses," this is all that comes into play -- say you have $20K in income, and then $15K in various expenses (depreciation, utilities, interest, supplies, repairs, legal, taxes, insurance), that leaves you with only $5K of taxable rental income. As Waltworks points out, spending $40K on capital improvements doesn't mean you suddenly go from $15K expenses to $55K expenses -- at that level, you're talking about capital improvements that require a depreciation schedule, in which case the portion of the expense that you "count" each year will be small, because you'll spread it out over a period of time.

That said, it's totally possible to run an on-paper loss with a small rental business (I do!). If your parents have a MAGI (Modified Adjusted Gross Income) of under $150K, and if they qualify as "active participants" in their real estate business (Google "special allowance for rental real estate activities with active participation"), they can subtract that business loss from their other (non-rental) taxable income. Example: Rental income of $20K; rental expenses of $25K. Taxable rental income is $0, and then they can also subtract the $5K loss from their taxable income.

Note that $150K is MAGI, not gross income -- it's possible that you (and they) think of their income as being over $150K, but their MAGI could be under the limit.

If MAGI is indeed above $150K, you are correct that they cannot subtract rental losses from other income. However, they can bank those losses and count them in a future year when their rental is an on-paper profit (to reduce or eliminate any taxable rental profit at that time), or when their overall MAGI is lower (in which case losses could be deducted from other taxable income). These are called "unallowed losses" and they're recorded on Form 8582 as part of a tax return. So even if they're not worth anything now, they can have value in a future year.

I have no wisdom for you on how to properly split this rental business with your parents, however!

px4shooter

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Re: Tax Deductions on Rental
« Reply #6 on: November 03, 2018, 09:28:02 AM »
And don't think the losses/repairs can all go in one year. You may have to use a schedule on the repairs because they are actually capital improvements. It just depends on what is done.