Low Income + First Rental = CPA needed or not?

Question

Hi guys,

About to close on my first rental property, out of-state (TN), cash purchase, through a turnkey company

I've had and will have a very low yearly income (less then $10K), and I've been filing my W2's via 1040EZ doing my own taxes the last few years.

From a little bit of research it seems like I won't be able to use the 1040EZ, but will have to change to the regular 1040.

I was curious how complicated is it to calculate and fill the rental income, deductions and depreciation for 1 rental property.

Willing to spend time to learn how to do it well.

How much time would it take to file taxes using a 1040 while having one W2 and one rental property assuming I've spent time learning how to do it.

Thanks in advance,

Tomer

Lance Lvovsky · Answer

@Tomer O. You would apply those percentages over to the purchase price. Also, do not forget to add certain items from your Settlement HUD Statement, which can be additions to your basis.

Buddy Holmes · Answer

@Tomer O.  I think the IRS would rather you use the purchase price and the few items that they allow you to add from your closing costs.  You can deduct  the percentage land value from your calculation or if close (and in your favor) perhaps the counties land value as given. Thei would be if it your opinion that the difference between you purchase price and the county value is do to the home appreciation and not lad appreciation.  Just be ready to defend your rational if needed.

The 20k total assessment is a means that your county uses to get good bond rating.  They can say we use only 25% of the real property value as a basis for applylng or milage (tax) rate to collect taxes.

Tomer O. · Answer

Thanks for all the responses everyone!

@Buddy Holmes

I'm in the process of finding my depreciation numbers.

those are the county assessor numbers:

Land Appraisal: 														 														 $ 15,500

Building Appraisal: 																												 $ 64,500

Total Appraisal:                                                              																												 $ 80,000

Total Assessment:

$ 20,000

So with simple math I get to 80.6% building value vs. 19.4% land value.

Should I carry those percents over to my purchase price? Or my appraisal number (which is lower, since I'm paying turnkey premium)?

I should mention that it's a private and  independent appraisal since it's a cash purchase.

Also wondering what does that $20K Total  Assessment means in the county assessor page.

@Eric C.

I'm currently in Rockalnds / South Africa, gonna be here for June and July..

Eric C. · Answer

Tomer,  Will you be around the Red in July?  Doing 1040 taxes is pretty easy if you use a filing software like turbotax or taxact.

Buddy Holmes · Answer

@Tomer O., Good advise on Turbo Tax as well as run it by a REI knowledgeable CPA in consultation.

The CPA visit should be planned late in the first year or definitely well before April 15!

The above caution on getting depreciation set up correctly is very good advise.  The key to this is establishing how much the land value is, as a portion of your purchase price.  My suggestion is to check your local county tax office.  If not online, your can visit them for their split of land and improved property values.  Save this determination in your tax records of the purchase for as long as you own the property!  The improved property and a few items from closing can then be divided  by the IRS' 27.5 year life to determine your yearly depreciation amount.  Turbo Tax does this for you based on what you input for the land value and the sales price and closing items.

If the property you have bought, or are buying, was recently re-habed, your might be able to further consider the 5 and 15 year life items that are new or newly added.  If you can get the receipts, and/or establish a written documentation of these with photos and sources in a "Cost Segregation Analysis" then take the total cost off your 27.5 year life property and add them back under the 5 year (flooring, rugs, light fixtures, appliances, etc>) or as 15 year property (landscaping, lawn sprinkling systems, patios, new driveways, etc.)  Uncle Sam even allows a special added deduction for these type of rehab items and Turbo Tax can lead you through the calculations.  Unfortunately your state may not allow this (SC does not :>(( ) but Turbo Tax handles this as well.  You could easily owe the IRS zero in this case!

Take the time to learn how to do these, print out your return as you see it and run it by a good CPA in consultation.  Now you are ready to buy more and you have new insights in what to look for in you next properties.

Cheers, Buddy

Ashish Acharya · Answer

You can absolutely handle this for now. All the leading tax preparation software can help you with few rentals.  However, I would recommend consulting with CPA when you plan to make another investment decision or improvements, and so forth. CPA will help you take tax advantage positions that software might not take because most of the software are logic based and cannot take judgments as CPAs can take. As you grow, consider getting a CPA.

Steven Hamilton II · Answer

I somewhat agree with those who posted above me. I will tell you quality advice in the beginning is well worth it.

I cannot tell you how many times I have represented clients that prepared their own tax return before the IRS.  I do quite a bit of representation work in addition to my practice. I specialize in working with real estate investors. I represent a great deal of taxpayers before the IRS each year.

Be VERY VERY careful when you prepare your own return not to duplicate expenses.

Brandon Hall · Answer

@Tomer O. if you're willing to spend the time, you can definitely learn how to handle one property (or even a few) on your own. However I'd strongly advise that you be honest with you ability to comprehend financial information and read and interpret tax code. Some people find this easy, others not so.

Don't just read the IRS pubs. If you're preparing your returns based on the IRS pubs, you're already fighting a losing battle.

Get a CPA to review your completed return prior to submission. Should only cost a few hundred bucks.

Low Income + First Rental = CPA needed or not?

Most Popular Reply