Author Topic: possible tax deductions for rental  (Read 3347 times)

NinetyFour

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possible tax deductions for rental
« on: December 28, 2013, 11:54:15 AM »
I am brand new to having a rental, and so I am looking for some basic help with the income/expenses/taxes associated with it.

The situation is a bit peculiar, perhaps.  I bought the main house and lot 7.5 years ago.  I took my time (and spent lots of $$) renovating the accessory dwelling unit (ADU).  In August of 2012, I moved out of the main house and into the ADU.  I started renting out the main house in the middle of August 2012, and have rented it ever since (to the same tenant).

Since my rental income in 2012 was not much, I didn't make the effort to do fancy stuff on my taxes for that year.  I just reported the rental income and paid tax on it.

However, this year, the extra income is significant enough to make me wonder if I should treat this situation more formally (deduct depreciation, etc.) at tax time.  I have also had some maintainance issues and would like to deduct a portion of those expenses.

A little more information:  both the main house and the ADU are on the same lot.  The water/garbage/sewer, electric, and natural gas bills are for both houses (combined).

I recently had the whole place appraised (when I did a refi) a few months ago, but the appraisal value is for the lot and both houses combined.

So, I guess I am wondering how to proceed.  I am considering seeing a tax professional, perhaps just this year, in order to get set up regarding taxes with this rental.  Perhaps, after this year, I can then do the taxes myself.

All suggestions/input is welcome!  Thanks in advance.

_JT

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Re: possible tax deductions for rental
« Reply #1 on: December 28, 2013, 12:15:01 PM »
I think in your situation a tax professional would be well worth the money.
« Last Edit: December 28, 2013, 12:38:44 PM by _JT »

NinetyFour

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Re: possible tax deductions for rental
« Reply #2 on: December 28, 2013, 12:20:30 PM »
Yep--thanks. That the direction I am leaning in.

Johnny Aloha

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Re: possible tax deductions for rental
« Reply #3 on: December 30, 2013, 10:26:47 AM »
In this situation, there are some grey areas.  Definitely consult a CPA.

We are in a similar situation.  The answer depends on if you are charging market rent or not.

If you are charging market rent, then it's worthwhile to deduct all relevant maintance expenses.  All shared utilities (and insurance) would be pro-rated reasonably (could be by square footage, number of adults living on each side, whatever).  Mortgage interest and property taxes don't need to be pro-rated as they are deductible either way.

If you are declaring the rental income, you also want to take depreciation.  This would also be pro-rated reasonably.  Don't forget that your cost basis (amount to depreciate) will be purchase price + closing costs + improvements.

Make sure you keep good records for income and expenses.  And document your reasoning for pro-rating things.

If you are charging below market rent, it gets into a grey area.  Some CPAs would consider it cost sharing, not rental income, and therefore would tell you not to delare it. 

You also might find these threads helpful: http://www.bogleheads.org/forum/viewtopic.php?f=2&t=110180.  There was a similar thread that was 8 pages long and really showed how much of a grey area this is.  Can't find it now.

* Edit: I am not a CPA!  and all the other standard disclaimers.
« Last Edit: December 30, 2013, 10:28:21 AM by Johnny Aloha »

NinetyFour

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Re: possible tax deductions for rental
« Reply #4 on: December 30, 2013, 12:20:29 PM »
Johnny Aloha--thanks very much for that feedback!

Although I could probably get more rent than what I am currently charging, I think it would be considered market rent.

On my "to do" list this week is finding/calling a CPA.

Thanks again!