Category Archives: Tax

Tenant rent nonpayment- can I deduct the loss

I will discuss the tax implications of tenant rent non-payment. You will learn what you can deduct and what you can’t.

Depreciation, Maintenance and collection expenses

Depreciation of the property is not affected by a tenant. You claim depreciation regardless

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whether the property is rented or not. Expenses incurred to maintain the property are also unaffected by the tenant payments. Deductions for taxes, insurance and interest are unchanged. Expenses incurred to collect rent are costs of doing business. Mailing late notices, trips to the property or bank are all normal expenses to collect the rent.

Loss of Income is not deductible

You may not deduce the loss of profit for non-payment. The profit would be in the income after expenses. You never received the money as income so it was never yours to lose. The money will not show up on the tax return.

Good Samaritan Pitfalls

No good deed goes unpunished. If you lower the rent below fair market, you may lose your profit motive for owning the property. If the tenant is a relative or close friend, reduction of rent may be seen by the IRS as converting the property to personal use. If that occurs, then you lose your deductions for depreciation, maintenance, insurance and other associated business deductions.

You must maintain a business posture throughout the rent recovery process. Do not let tenant rent nonpayment cause you to lose your tax deductions.

Collecting rent – three rules you must follow

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How to Avoid Obamacare Tax: Become a real estate professional

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Avoid Obamacare Tax: Another reason to become a real estate professional

Avoid the Obamacare tax and save 3.8%. This strategy has a huge impact on your bottom line. In my article How to claim Passive Loss Limitation Exemption on being exempt from the $25,000 passive loss limitation, I detailed the process on how to qualify as a real estate professional. The Obamacare tax gives you another incentive to become a real estate professional in the eyes of the IRS. Find out how.

Obamacare Tax Safe Harbor

The tax code provides a safe harbor for those who qualify as a real estate professional. The entrance requirements into the harbor are as follows:

You must qualify as a real estate professional, and
You must participate 500 hours per year in real estate activities

Being a real estate agent or just owning rental properties is not enough to qualify as a real estate professional. See How to claim Passive Loss Limitation Exemption on how to qualify as a real estate professional.

Real Estate Business Avoid Obamacare Tax

Here is some more good news. Real estate professionals who qualified for the above criteria in five of the last ten years are considered to be in a real estate business. That means profits from your rental real estate business is EXEMPT from the Obamacare Tax. How about some more good news? When your sell your property, profit from the sale is also avoid the Obamacare Tax. Now this is a harbor you definitely want to chart a course to.

More tax advantages for Real Estate Business

Business income is exempt from the Obamacare Tax. Your business has other tax advantages that are discussed elsewhere.

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Use Section 179 Tax Deduction on Your SUV

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Section 179 Tax Deduction Overview

People complain about our tax system. I actually like our system. It favors those who know the rules. My favorite tax rule can be found in IRC Section 179 tax deduction. This section of tax code defines the accelerated deductions available for tangible personal property used for business use. It is a great way for the government to help you purchase the capital equipment you need to run your business. Section 179 is part of the stimulus package enacted in 2008 and it keeps getting extended. You immediately can claim up to $25,000 deduction on a Section 179 qualifying vehicle.

Section 179 Limits

The yearly Section 179 tax deduction limit is $500,000 per year. You may purchase up to $2,000,000 of qualifying property each year. The bonus deprecation has been extended. It is 50% in 2016 and 2017, 40% in 2018 and 30% in 2019.

Business Income Sources

1) Net income or loss from your business

2) Net income or loss from the spouses business

3) Proceeds from the sale of assets from you and your spouse’s business

4) Interest income from you and your spouse’s business

5) Net income or loss of your rental property business

6) Gains or losses from the sale of rental property which qualify for section 1231

7) And finally, you and your spouse’s other W-2 earned income

That is a lot of income. I purposefully saved the W-2 income for last. It is the source of the most confusion (I must reiterate here that I always advise using a tax specialist. I do not give tax advice.)

Married Tax Payers and Section 179

The IRS treats you and your partner as single taxpayer when you file jointly. If you file separately, you must declare how you are going to account for the Section 179 deductions.

Section 179 Example

Your business has $10,000 income for the year and your spouse earned $75,000 in W-2 income. You buy a qualifying SUV for $37,500. Your total income is $85,000. You deduct the maximum allowed $25,000 for the vehicle. You are under the $500,000 limit. Your taxable income is now $60,000. If you are in the 30% tax bracket, you just saved $7,500 in federal income taxes.

Section 179 is a rule you definitely want to know, understand and use. It will help save you tens of thousands of dollars in your business.

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Do not miss out when I discuss the rules and game plan on how to make these deductions real in your life.

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Sell your primary residence with a home office avoiding capital gains

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Avoiding primary residence capital gains tax on home office

The primary residence capital gains tax is something you can avoid. You can even be avoiding capital gains tax when you have a home office. Your Uncle Sam really favors home owners. Not only does he allow you some tax free gains on your principle residence. He also gives you more tax free and deferred cash if you use the home as your office or rental. You must know the rules and play the game accordingly to avoid the taxes. It takes some planning but as you will see it is well worth it. I have been using my primary residence property as a rental for the past 2.5 years. I will employ these rules to avoid and defer tax liability. The strategy involves combining Section 121 exclusions with a 1031 exchange

Tax Free Sale of Home with Home Office

You bought a home for $200,000 and sell it for $300,000. Over that time you have taken $30,000 in home office depreciation, which is 20% of your home. Your adjusted cost basis in the property is $170,000. This gives a capital gain of $130, 000. This is how it breaks out.

The IRS defines the order on which the exclusions are made:

Section 121 comes first. It cannot be applied to depreciation claimed after May 6, 1997.
Tax on gain is imposed on gains over the Section 121 limits.
1031 exchange is applied to the business portion to defer business tax liabilities
You add the Section 121 exemptions to the adjusted basis of the new property.

	Total	Home	Office
Basis of Property	$200,000	$160,000	$40,000
Depreciation	($30,000)	NA	($30,000)
Adjusted Basis	$170,000	$160,000	$10,000
Gain from sale	$130,000	$104,000	$26,000
Section 121 exclusion (1, 2)	(120,000)	($104,000)	($16,000)
1031 Exchange (3)	($10,000)	NA	($10,000)
Gain subject to tax	Zero	Zero	Zero

The example shows that 15% capital gains tax was avoided and the 31% tax on ordinary income.

If you found this article useful maybe you will enjoy

How to Deduct More Than $25,000 in Passive Losses Per YearTax Benefits of the Home Office How to Deduct 100% Business Entertainment Meals

Make Your Next Sports Utility Vehicle Tax Deductible With Section 179

DISCLAIMER

This article is for training purposes only. Jody Wall does not warranty the accuracy of the training. It is not intended to be legal or accounting advice. Seek competent consultation for your particular situation. Readers assume all responsibility for their decisions.

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How to take tax deductions for travel to rental property

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Deduct Mileage to and from Rental Property

You can take tax deductions for travel to rental properties if you know the rules. Under normal circumstances travel from home to rental property would not be deductible. The travel would be considered personal. Traveling from home is commuting like driving to a job.

Like most things it is not black and white. The key word in the sentence is the word “home.” There is a provision to take a deduction for the travel if you meet certain criteria.

You can deduct mileage when traveling to your rental property if you meet two criteria

1) You are engaged in the business of owning rental property

2) You have a home office from which you commute.

So if you are in business and the primary location of the business is your home office, then the travel to the rental properties is deductible as a business expense. You have to love our tax laws.

Rental Property is either Business or passive investment

26 U.S. Code § 1231 – Property used in the trade or business and involuntary conversions

(1)General rule The term “property used in the trade or business” means property used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 167, held for more than 1 year, and real property used in the trade or business, held for more than 1 year,

Rental Property Business Activity

The rental properties meet the Section 1231 definition of property used in a trade or business. You qualify as a business when you materially participate in running rental properties. Material participation should be ongoing and regular to qualify. Participation includes activities such as maintenance, hiring contractors, collecting rent, keeping accounts, screening tenants. Etc. See How to claim passive loss limitation exemption for more criteria on being considered a business with active participation.

Rental Property Passive Investment

If you do not participate in the running of rental property, the IRS will see the activity as a passive investment. Passive investments ae not running a business. For example, I own stock in my 401k. I do not participate in the decisions of the portfolio or manage the fund. I am not a mutual fund manager Therefore; I am a passive investor.

Home office

If my regular place of business is my home office, then travel to the rental property is deductible because I am traveling as an active part of my trade or business. I must let contractors in for maintenance. I show the property to prospective tenants. In fact, travelling to the properties to conduct these activities is one way to prove I am actively participating.

Benefits of Real Estate Businesses

The tax benefits of owning real estate are accelerated and enhanced if running them is treated as a business. Jodywallrealtor.com and Cincero Investment Properties, Inc. exist in order to make real estate investing available and easy.

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How to claim Passive Loss Limitation Exemption

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Passive Loss Limitation Exemption

Passive Loss Limits

If you are invested in multiple residential properties and an active buy/fix/ hold investor, then you will come up against the $25,000 passive loss limitation imposed by the tax code in section IRC § 469(g). It is imperative that you understand IRC § 469(c)(7) for real estate professionals.

My Real Estate Professional Story

Here is my story. Two years ago I first became very active in buy/fix/ hold. I studied the rules

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on capital gains vs. expenses. I trained my contractors on what to do. I kept meticulous records. I was set to deduct my passive losses against my regular income and did I need it. My husband got a new job and as part of the severance he had to cash in his stock options or lose them. We had a lot of capital gains and did not withhold money to pay the taxes since we did not expect a job change. We sent our records to our accountant and crossed our fingers.

The day came when the phone rang. I knew it was our accountant before I picked it up. I asked, “Bob, give it to me strait.” He said we owed over $15,000 in taxes. When I picked myself off the floor, I asked him how that could be? We had so many deductions? We kept good records. I expected something but not that much.

He said, “Jody you are maxed on your passive loss deductions. Your AGI put you over the amount for the $25,000 loss. We will carry the deductions to the next year.”

“No way Bob! I cannot be maxed on the passive loss deductions. I am a real estate professional.”

“I know. You gave me your Realtor® number but that does not count.”

“Bob, you did not understand me. I am an agent but I AM a real estate professional. My occupation on the tax form says property manager. According to IRC § 469(c)(7) for real estate professionals I am exempt from passive loss limitations.”

Bob agreed to re-figure my taxes and said he would get back with me at the end of the week. Later that week he called and said we will get about $5,200 back on our return. After I came down from the ceiling I thanked Bob and asked for him to e-file our return. Knowing this one section of the tax code saved me over $20,000 in taxes in one year.

Passive Loss Exemption Rules

Here’s what you need to do to qualify as a real estate professional. It is not about being a Real Estate agent. To qualify as a real estate professional, the taxpayer must spend:

more than 50 percent of his/her time in real estate activities; AND,
more than 750 hours in real estate activities.
A real estate professional must materially participate in each rental activity for the loss to be deductible

How to qualify as a real estate professional

Real Estate Professional

To be a real estate professional, you must spend the majority of your time in real property businesses:

Development or redevelopment
Construction or reconstruction
Acquisition or conversion
Rental
Management or operation
Leasing
Brokerage, not sales agent

One spouse alone must meet both tests. In addition, services performed as an employee do not count unless the employee is at least a 5 percent owner in the real estate business.

You can show your real estate business activities in many ways. Like with anything, it takes good record keeping.

Hint: Reduce the amount of time you work on your job. You only have to count hours as work that you actually spend doing work. Deduct vacation time from the total. Travel time does not count as work. You can deduct time you spend at meetings. In all, you may not work a full 40 hours a week for 52 weeks.

Achieve the real estate professional time requirements

Capitalize on down time to run your real estate business. Education is material and necessary for your job. You can listen to tapes to and from work. You can search for properties during lunch. Going to conferences and networking also count. Did you show a property? Place an ad? Do tenant screening? Select, hire and pay a contractor? These activities will help you get to the 750 hours.

I document all of my appointments, viewings and travel in my Tax Bot. I keep all of my expenses in there as well.

Finally, before rental losses are deductible without being limited by the passive losses rules, the taxpayer must materially participate in each rental. This can be difficult to document.

Group properties to achieve material participation

Fortunately, you are able to make a one-time election to treat all of your rental properties as a single activity. This filing is done once. Add the statement to your tax return. Even if you outsource the property management, be sure to have the contract state that you have final say on all tenants and that you must approve all expenses over a certain amount. I would do this as a matter of good business practice.

Learning these rules and executing a plan can save you thousands in taxes. I was able to put money down on another property with my tax savings for the one year alone.

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Tax Strategy: How to get 100% business entertainment tax deductions

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Can you deduct 100% of business entertainment?

Saving money on taxes keeps money in your pocket. Tax savings go directly to your bottom line. The real estate business is a people business. You can’t sit in your office and expect to meet clients, tenants, prospects, bankers, adjusters, appraisers and investors. You are going to be out and about and you are going to eat. The question is “Can I deduct 100% of my meal costs from my taxes?” The simple answer is yes, if you follow the rules. These tax rules are laid out in 26 CFR 1.274-2. Don’t worry. This article will explain it.

Business Entertainment Example

The short version says you can deduct your portion of the business entertainment meal if you have business reason to be there. You must transact business with someone. For example, you and Bob go to lunch and discussed the latest methods to get listings. The tab is $30. You pay your portion and Bob pays his. You both deduct your amount of the lunch. In this case, both you and Bob actively pursued future business.

Business Entertainment Rules

Let’s look at the rules. There are two rules associated with the example above.

1) The expenditure was directly related to conduct your trade or business.

2) Either preceding or following the expenditure, there was a genuine business discussion.

How to document business entertainment expenses

As with any tax deduction, you must document that you met the requirements. In the example above, you will get a copy of the receipt and note your portion of the meal. You will write down who you transacted business with and what was discussed. You do not need a long list of notes of the discussion. Simply stating “discussed future business opportunities” will suffice.

Can you deduct your spouses meal?

A big investor is coming and you want to meet them. Your husband is with you as you go out. Can you deduct his meal as business entertainment? Yes. The states

The spouse of a person referred to in paragraph(c)(3)(iv) of this tax code will be considered closely connected to such a person for purposes of this subparagraph.

You must document who, what and where. The expense must be for transacting business. Good-will events do not meet the test. You cannot take a group out for the night as a good will gesture and take a deduction. You also cannot take a group a night club and expect to deduct it. Nightclubs are loud and the IRS does not anticipate business discussions in such an environment.

Be sure you do not try to tax deduct taking your employee to lunch 5 days a week and deducting it. The IRS will claim you are trying to offset normal living expenses. Limit the number of times you take the same person out to less than 30 times per year. Do not abuse the rule. If you are deducting 300 meals per year, then you will raise a flag. Remember, bulls get fed and hogs get slaughtered.

Tips to help you be audit ready

1 The expense must be directly related

You intend to do business at the time you spend the money
You discuss a topic that is intended to result in future business
The main reason you are there is do business
You spoke with person with whom you intend to do business

The expense occurs in an appropriate setting

The person you are with knows you want to conducting business
You spend the money in such a way to further your business
This is not a meaningful social or personal meeting

It is a business setting

A nightclub or theater is not conducive for conducting business. The business discussion can occur before or after the expense. It must be documented.

Business entertainment can be 100% tax deductible when you learn and follow the rules. If you found this article useful maybe you will enjoy

How to Deduct More Than $25,000 in Passive Losses Per Year

Tax Benefits of the Home Office

Make Your Next Sports Utility Vehicle Tax Deductible With Section 179

DISCLAIMER

Cover photo from travelhelp-corporatehousing.com

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How to get a college tax deduction paying your children

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Pay for college and get a tax deduction

Learn a great tax deduction strategy. Helping your children pay for college is one of those benefits of being a parent. Helping them pay for college and getting a tax deduction is a benefit of being a business owner. This post applies to your college age children over 18. When you hire a child who is under 18 for your proprietorship, they are exempt from payroll taxes. However, that is not the case for children over 18. Here is how you get the college tax deduction.

Hire the child for odd jobs

Summer is a great time for children to earn some money for college. You will likely have odd jobs around your Home Office during the summer months. Things your children can do include

prepare mass mailings
distribute fliers
make home office repairs
Update social media campaigns
Work on your website
research blog posts

Contract labor rather than W-2 employee

If you hire your child as a W-2 employee, you will have to pay employment payroll tax. You will not pay these taxes if you hire the child as contract labor. You ask, “Does this make my child subject to self-employment taxes?” No

The Supreme Court ruled that self-employment trade or business meant the job needs to be have continuity and regularity. The contract jobs described above are not regular. They are certainly not meet continuity. They are not part of a trade or business. There is no expectation that your child will start a business performing occasional tasks like those described above. They are one-off tasks. Such activity ends with the summer.

Because your child is not in a business, you provide all of the materials. They provide the labor. They should not have business expenses to claim.

Making the college tax deductions work

You pay your child $10,000 for the summer. There are no payroll deductions. It is a business expense to you and you deduct the $10,000. In the 30% tax bracket, you save $3,000 in federal taxes. The child will pay 6% or $600 in taxes. The net savings for the family is $2,400 and the added bonus of the child learning to earn money.

DISCLAIMER

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Home office tax deductions can save you thousands

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Home Office Tax Deductions Defray Living Expenses

Home office tax deductions offer so many tax advantages it makes me wonder why more people

Home office

do not start their own business. One of the rewards of being a business owner is cutting back on the daily commute grind. The home office is a way to transfer some of your living expenses to your business and get a deduction. Some of the benefits of the home office include:

Deduct a portion of mortgage interest, taxes, insurance, utilities
Repair deductions – repairs on your principle residence are not deductible but office repairs are.
Pest control
Office equipment depreciation
Building depreciation

Home Office Tax Deduction Limits

These amounts really add up. The amount of the deduction is limited to the income from the business. If you no income, you do not have a deduction. If you have little income, you have little deduction. You may think, “I do not make any money now so the home office deduction is not worth it.” That thinking is faulty. I always say, “Every deduction is sacred. Every deduction counts. Deductions shall not be wasted. Oh make the tax man shout.” Claim the deductions now and every year. They can be forwarded to future tax years in perpetuity until you do have income to attack. If you are in business, you intend to make money. When you do, limit the amount the tax man taketh.

Example Home Office Tax Deduction Calculations

The table calculates the home office deduction of 10% office use of a 1400 square foot home. You paid $140,000 for the home.

Item	Gross Expense	Office Percentage	Deduction
Interest	$5,136	10%	$513.60
Property Tax	$2,400	10%	$240.00
Insurance	$800	10%	$80.00
Utilities	$3,200	10%	$320.00
Depreciation	$4,364	10%	$436.40
Repairs – whole house	$3,000	10%	$300.00
Repairs -office	$400	100%	$400.00
	Total	$1,854.00
	25% tax Bracket	$463.50

I know I would rather have the $463 in my pocket rather than the governments. If I deferred this amount for two years, it will still be a tidy sum and will be added to the intervening year’s deductions.

Vehicle Tax Deduction

Commuting to work is not considered business miles. Eliminating the commute will lower the number of personal miles on your vehicle. You benefit from a higher percentage of business use and save yourself the wear and tear on your vehicle and your stress. I certainly do not miss sitting in traffic 90 minutes a day.

DISCLAIMER

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