Author Topic: Real estate / home improvement tax deductions on general income  (Read 608 times)

YoungStache

  • 5 O'Clock Shadow
  • *
  • Posts: 80
  • Location: Washington
Hello guys.

I am wondering if real estate and home improvement tax deductions can be applied to general taxable income after offsetting rental income.

I have short and long term capital gains this year; short term capital gains will be taxed as ordinary income. Can the real estate deductions be used to offset this income?

MDM

  • Walrus Stache
  • *******
  • Posts: 8553
Re: Real estate / home improvement tax deductions on general income
« Reply #1 on: July 27, 2018, 08:01:17 PM »
Using whatever losses you are allowed on Schedule E, the net result goes on Form 1040 on line 17 (at least it did in 2017) and is treated as ordinary income.

You can't take rental expenses and move them from Schedule E to Schedule D. ;)

YoungStache

  • 5 O'Clock Shadow
  • *
  • Posts: 80
  • Location: Washington
Re: Real estate / home improvement tax deductions on general income
« Reply #2 on: July 27, 2018, 08:23:11 PM »
Using whatever losses you are allowed on Schedule E, the net result goes on Form 1040 on line 17 (at least it did in 2017) and is treated as ordinary income.

You can't take rental expenses and move them from Schedule E to Schedule D. ;)

Are rental expenses, home improvements/rehab, and depreciation only applicable to schedule E?

How does the standard deduction factor in with schedule E and D?

So basically you're saying that these expenses and deductions can only offset rental income?
« Last Edit: July 27, 2018, 08:24:47 PM by YoungStache »

MMbergmann

  • 5 O'Clock Shadow
  • *
  • Posts: 54
Re: Real estate / home improvement tax deductions on general income
« Reply #3 on: July 27, 2018, 08:34:04 PM »
Using whatever losses you are allowed on Schedule E,

This means different situations allow different loss limitations. The losses could offset any other type of income you have.

tralfamadorian

  • Pencil Stache
  • ****
  • Posts: 889
Re: Real estate / home improvement tax deductions on general income
« Reply #4 on: July 27, 2018, 08:39:19 PM »
So basically you're saying that these expenses and deductions can only offset rental income?

You can take up to $25k/yr in rental losses against your other income. There are qualifiers and income phase outs you can read more about here:

https://taxmap.irs.gov/taxmap/pub17/p17-049.htm

CareCPA

  • Bristles
  • ***
  • Posts: 310
  • Location: Northcentral PA
    • Care CPA - Tax, Accounting and Payroll
Re: Real estate / home improvement tax deductions on general income
« Reply #5 on: July 30, 2018, 09:42:48 AM »
Using whatever losses you are allowed on Schedule E, the net result goes on Form 1040 on line 17 (at least it did in 2017) and is treated as ordinary income.

You can't take rental expenses and move them from Schedule E to Schedule D. ;)

Are rental expenses, home improvements/rehab, and depreciation only applicable to schedule E?

How does the standard deduction factor in with schedule E and D?

So basically you're saying that these expenses and deductions can only offset rental income?
Your posts are a little vague, so I just want to make sure some things are clear.
If you have rental properties, the expenses incurred for those properties go against the income received for those properties. This comes down to a net profit or net loss amount. That amount is transferred to page 1 of the 1040, and depending on your income and career, those losses may or may not net against other types of income.
There is no direct relation to itemized/standard deductions (unless the property is a shared personal residence and business/rental).

Renovations/rehabs/improvements on any of your personal residence(s) have no tax benefit.

YoungStache

  • 5 O'Clock Shadow
  • *
  • Posts: 80
  • Location: Washington
Re: Real estate / home improvement tax deductions on general income
« Reply #6 on: July 30, 2018, 05:40:46 PM »
Using whatever losses you are allowed on Schedule E, the net result goes on Form 1040 on line 17 (at least it did in 2017) and is treated as ordinary income.

You can't take rental expenses and move them from Schedule E to Schedule D. ;)

Are rental expenses, home improvements/rehab, and depreciation only applicable to schedule E?

How does the standard deduction factor in with schedule E and D?

So basically you're saying that these expenses and deductions can only offset rental income?
Your posts are a little vague, so I just want to make sure some things are clear.
If you have rental properties, the expenses incurred for those properties go against the income received for those properties. This comes down to a net profit or net loss amount. That amount is transferred to page 1 of the 1040, and depending on your income and career, those losses may or may not net against other types of income.
There is no direct relation to itemized/standard deductions (unless the property is a shared personal residence and business/rental).

Renovations/rehabs/improvements on any of your personal residence(s) have no tax benefit.

Okay so basically: I'll be closing on a rental property in PA this week. It's rented out, but I also want to convert the basement to have an additional rental unit. Also, I may be purchasing a fixer-upper in the area as well and having that rehabbed before renting out. I expect the rehab costs and repairs, operating expenses, and rental depreciation to exceed my rental income for the rest of the 2018 year. Can that difference be deducted from the rest of my income for this year? I had a little salary income, and capital gains that will be taxed as ordinary income.
« Last Edit: July 31, 2018, 02:18:42 AM by YoungStache »

MDM

  • Walrus Stache
  • *******
  • Posts: 8553
Re: Real estate / home improvement tax deductions on general income
« Reply #7 on: July 30, 2018, 06:57:45 PM »
Okay so basically: I'll be closing on a rental property in Pittsburgh, PA this week. It's rented out, but I also want to convert the basement to have an additional rental unit. Also, I may be purchasing a fixer-upper in the area as well and having that rehabbed before renting out. I expect the rehab costs and repairs, operating expenses, and rental depreciation to exceed my rental income for the rest of the 2018 year. Can that difference be deducted from the rest of my income for this year? I had a little salary income, and capital gains that will be taxed as ordinary income.
Have you read the Pub. 17 items tralfamadorian linked?

I find the pdf version easier but YMMV.

CareCPA

  • Bristles
  • ***
  • Posts: 310
  • Location: Northcentral PA
    • Care CPA - Tax, Accounting and Payroll
Re: Real estate / home improvement tax deductions on general income
« Reply #8 on: July 30, 2018, 07:56:13 PM »
Using whatever losses you are allowed on Schedule E, the net result goes on Form 1040 on line 17 (at least it did in 2017) and is treated as ordinary income.

You can't take rental expenses and move them from Schedule E to Schedule D. ;)

Are rental expenses, home improvements/rehab, and depreciation only applicable to schedule E?

How does the standard deduction factor in with schedule E and D?

So basically you're saying that these expenses and deductions can only offset rental income?
Your posts are a little vague, so I just want to make sure some things are clear.
If you have rental properties, the expenses incurred for those properties go against the income received for those properties. This comes down to a net profit or net loss amount. That amount is transferred to page 1 of the 1040, and depending on your income and career, those losses may or may not net against other types of income.
There is no direct relation to itemized/standard deductions (unless the property is a shared personal residence and business/rental).

Renovations/rehabs/improvements on any of your personal residence(s) have no tax benefit.

Okay so basically: I'll be closing on a rental property in Pittsburgh, PA this week. It's rented out, but I also want to convert the basement to have an additional rental unit. Also, I may be purchasing a fixer-upper in the area as well and having that rehabbed before renting out. I expect the rehab costs and repairs, operating expenses, and rental depreciation to exceed my rental income for the rest of the 2018 year. Can that difference be deducted from the rest of my income for this year? I had a little salary income, and capital gains that will be taxed as ordinary income.
From the information you shared, you can most likely offset some W-2 income with Rental losses.

The question you didn't ask, but is relevant, is that many of those rehab expenses will not be deductible this year. Costs to turn the basement into a unit, and costs to rehab a unit before rental, are most likely going to be capitalized and depreciated.

YoungStache

  • 5 O'Clock Shadow
  • *
  • Posts: 80
  • Location: Washington
Re: Real estate / home improvement tax deductions on general income
« Reply #9 on: July 30, 2018, 10:19:51 PM »
Using whatever losses you are allowed on Schedule E, the net result goes on Form 1040 on line 17 (at least it did in 2017) and is treated as ordinary income.

You can't take rental expenses and move them from Schedule E to Schedule D. ;)

Are rental expenses, home improvements/rehab, and depreciation only applicable to schedule E?

How does the standard deduction factor in with schedule E and D?

So basically you're saying that these expenses and deductions can only offset rental income?
Your posts are a little vague, so I just want to make sure some things are clear.
If you have rental properties, the expenses incurred for those properties go against the income received for those properties. This comes down to a net profit or net loss amount. That amount is transferred to page 1 of the 1040, and depending on your income and career, those losses may or may not net against other types of income.
There is no direct relation to itemized/standard deductions (unless the property is a shared personal residence and business/rental).

Renovations/rehabs/improvements on any of your personal residence(s) have no tax benefit.

Okay so basically: I'll be closing on a rental property in Pittsburgh, PA this week. It's rented out, but I also want to convert the basement to have an additional rental unit. Also, I may be purchasing a fixer-upper in the area as well and having that rehabbed before renting out. I expect the rehab costs and repairs, operating expenses, and rental depreciation to exceed my rental income for the rest of the 2018 year. Can that difference be deducted from the rest of my income for this year? I had a little salary income, and capital gains that will be taxed as ordinary income.
From the information you shared, you can most likely offset some W-2 income with Rental losses.

The question you didn't ask, but is relevant, is that many of those rehab expenses will not be deductible this year. Costs to turn the basement into a unit, and costs to rehab a unit before rental, are most likely going to be capitalized and depreciated.

What exactly does "capitalized" mean? Does it mean that the home improvement costs are added to the value of the home, and the cost is depreciated over 27.5 years?

Also, does the fact that I own >10% interest in the investment deem me as an "active" participant, and as such: I can offset passive losses against any income? I am not interested in flipping, just holding for rental income.
« Last Edit: July 31, 2018, 02:10:57 AM by YoungStache »

YoungStache

  • 5 O'Clock Shadow
  • *
  • Posts: 80
  • Location: Washington
Re: Real estate / home improvement tax deductions on general income
« Reply #10 on: July 31, 2018, 02:13:06 AM »
Okay so basically: I'll be closing on a rental property in Pittsburgh, PA this week. It's rented out, but I also want to convert the basement to have an additional rental unit. Also, I may be purchasing a fixer-upper in the area as well and having that rehabbed before renting out. I expect the rehab costs and repairs, operating expenses, and rental depreciation to exceed my rental income for the rest of the 2018 year. Can that difference be deducted from the rest of my income for this year? I had a little salary income, and capital gains that will be taxed as ordinary income.
Have you read the Pub. 17 items tralfamadorian linked?

I find the pdf version easier but YMMV.

Nice - I see the part where if you were an "active" participant in a passive rental investment, you can deduct up to 25,000 from your non-passive income. Nice!

CareCPA

  • Bristles
  • ***
  • Posts: 310
  • Location: Northcentral PA
    • Care CPA - Tax, Accounting and Payroll
Re: Real estate / home improvement tax deductions on general income
« Reply #11 on: July 31, 2018, 10:00:43 AM »
What exactly does "capitalized" mean? Does it mean that the home improvement costs are added to the value of the home, and the cost is depreciated over 27.5 years?

Also, does the fact that I own >10% interest in the investment deem me as an "active" participant, and as such: I can offset passive losses against any income? I am not interested in flipping, just holding for rental income.
Yes, it must be depreciated over time. That could be 27.5 years, or less, depending on the scope of renovations, what was done, if there is a possibility to segregate costs, etc.

Your ownership does not mean you are active. I can own 99% of a business, but hand off all the duties to a manager and be passive. Or I can own 20% and be a silent partner, still passive. I can own 1% and do all the work, that would make me active.
There are specific IRS criteria for what makes you active, especially in rental real estate (which is a default passive activity unless you meet the specific criteria).