tax refund on rentals claim losses? confused?

Question

Ok quick question regarding taxes. I purchased my first rental and on my earned income i make under 25k a year as a server (don't claim enough tips), basically I am looking at purchasing Albert Aiello's tax software, but would it be worth it? I am very inexperienced with taxes and am wondering a couple things.

He claims many people are saving a ton of money if doing your taxes right and setting it up under an LLC and C Corp. When he talks about people saving how does it work at the end of the year? Do you landlords show a loss on your taxes after you claim all your expenses and actually receive decent size tax returns off that? Or is this mostly for landlords with many properties who are saving themselves from being taxed alot on rental income.

My question is even with one rental can I benefit from a greater tax return by showing losses? thanks

Jeff S. · Answer

Don't know if this is most efficient but I have always gone into painful detail directly into my checkbook when fixing up projects are under way. That is just me because I like being able to go back and see where all that money went. Guys like Will and Charles would no doubt have a speedier way of doing things, and on a professional level.

Account Closed · Answer

You would use schedule A to itemize property taxes, mortgage interest, points & PMI on a personal residence. Use Schedule E to report rental property income and expenses. Rental property doesn't necessarily lead to rental losses, but often does and can shield a fair amount of ordinary income depending on your circumstances. I think most beginning investors can do their own taxes though they may not identify all of the deductible expenses associated with a property. I often find missed expenses when reviewing returns. It is not uncommon that investors fail to report the points they paid on the HUD-1. Sometimes this doesn't amount to a lot though because points on investment properties must be amortized over the life of the loan.

Steve Babiak · Answer

I guess I'm mistaken then; in the past when I took rental deductions, I always had itemized, and past few years my accountant handles completing taxes. I do think that it can only be done with the full 1040, rather than with 1040A or 1040EZ, and that is probably what I associated with itemizing (the full 1040 does allow for the standard deduction to be used).

Dave Toelkes · Answer

At your income, I would be surprised if the amount of income tax you pay even with the standard deduction is high enough to even pay for the cost of Aiello's course. I don't think it would give you any benefit at all because, at your income, many of the tax tips and tax saving strategies won't give you enough tax savings to even pay for the course. There is nothing a CPA will do for you in preparing a tax return that includes one rental property that you can't do for yourself with TurboTax Premier software. The IRS Pubs give quite a bit of detailed guidance on reporting rental income and expenses on Schedule E. The tax return preparation for a rental activity is fairly straightforward and can be easily navigated yourself with the comprehensive help module in TurboTax Premier.

Dave Toelkes · Answer

Steve, I don't know where you got this idea, but you are completely off target. You can file a Schedule E to claim all your rental income and expenses and still take the standard deduction.

Matt R. · Answer

Actually, I wouldn't hire a CPA to do this. I'd just do my taxes myself. Through the year put all your expenses into a simple spreadsheet, grouped by category (use the Schedule E categories). Don't forget to keep those receipts. Then at the end of the tax year, add up each category and fill in Schedule E. Remember that the loss is a paper loss. So when looking at a loan lenders will probably want to see your income and debt numbers. In this environment, they might even want to see a copy of your tax returns to prove the numbers ! But the key will be whether you can sustain the payments on the loan - so they'll look at the cash coming in each month and what goes out. The depreciation aspect won't affect your prospects for getting a loan. I recall the question about an LLC coming up in a separate thread. That's always the trickiest question. Note that none of the above discussion involves an LLC. For asset protection, landlord and an umbrella policy is probably your best bet. But this is where I weasel out - I'd pay a knowledgable CPA or a lawyer for this. They will know your specific situation and can make recommendations tailored for you.

Account Closed · Answer

Ok awesome now when I hire a CPA is this something that I just keep track of on my own than at the end of the year during tax season I would show these deductions? Also when applying for another rental will it hurt my chances of conventional loan since I am showing losses? I am going to keep a separate business checking account for these activites and will use it strictly to get gas to drive to property, deposit rents, pay mortgage, drive around for properties, reia memberships, repairs, etc. Don't know if I should form an Llc yet though?

Steve Babiak · Answer

Of course, in order to do this, you have to skip the "standard deduction" and you have to itemize deductions.

Matt R. · Answer

You don't need fancy tax software, but I would defintely suggest "Taxes for Landlords" (can't remember the exact title) from NOLO. It was a huge help and definitely worth it. Here's how it will work for you. Get a copy of a schedule E tax form so you can follow along. line 3 : You have all that lovely income from your rental. lines 5 - 18 : You deduct ALL your business expenses - including buying books to help you run your business. Think of EVERYTHING that is necessary and reasonable for a business operation. line 20 : This is your depreciation on your property - (the price of the property minus the cost of the land) spread out over 27.5 years. Hopefully after subtracting all those costs, you have a net negative value. note that this is paper loss due to the large effect of the depreciation. Great, now you put this 'loss' into your main 1040 tax form, reducing your overall net income. Example rental income = 6k business expenses = 4k sub total = (6 - 4) = 2k This is the net cash in your pocket at the end of the year property cost was (100k - land cost of 10k) = 90k property depreciation is 90/27.5 = 3.3k 2k - 3.3k = net loss of -1.3k So, instead of paying tax on your income of 25k (ignoring all the other tax calculations) you pay tax on 25k - 1.3k = 23.7k OK, it's not a lot but it's better than giving the $$ to Uncle Sam.

Rick Barker · Answer

You will benefit greatly even with just one rental. Business expenses and Depreciation of assets/rental will almost always show as a loss on your return. I would hesitate to use software on your first tax reporting with a rental. It is better to go through a CPA who will ask the right questions and limit your risks.