Income property

[Jason Garrison]

I'm a newbie when it come to income property so I have a question about how the taxes work and what I should do to prepare for tax season.  I want to ensure I do this the correct way.

I've been in my house since Dec 2013 and I'm now turning the basement into a income property.  It's a two bedroom with one bath, utility room, kitchen, living room with working fire place.  

My goal is to rent this space for $1,000 each month.  I will handle the utilities to make things easier/less complicated.  

What do I need to be thinking about when it comes to an income property?  A few things that come to mind; Taxes, how do I market the space, should I do a flat rent and pay utilities.....  

Thanks in advance for the great feedback.  You are my inspiration!  I want to be financially free just like you.

Jason 

[Brandon Hall]

@Jason Garrison

I'd be careful about taking @Missy H.'s advice. While I'm sure she is doing her taxes correctly, I've corrected (in this past year alone) quite a few "do it themselves" landlords who have taken similar approaches to Missy's. Everything is fine until you're audited and saving on the CPA fee isn't worth the future headaches (or so I've been told by my clients). Additionally, I'd wager that these "do it themselves" landlords are not experts on the new tangible property regulations enacted Jan. 1, 2014. If that doesn't ring a bell, then don't do your own taxes. 

Unfortunately, the tax code is too complicated to accurately prepare your taxes without the help of a professional. I wish this weren't the case.

In terms of an income property, you are going to want to seek out a real estate savvy CPA and disclose all relevant information so that he/she can provide you with accurate, actionable advice. I can tell you right off the bat that you need to keep accurate records, which means receipts for all expenses. 

Assuming the basement has a private entrance, I'd say you've created a duplex. If this is the case, your half of your duplex receives the same tax treatment as a single family residence, expect for mortgage interest treatment. Since your mortgage and your property tax payments cover two properties, you'd generally write off half of the interest on Schedule A, the other half on Schedule E. 

Costs incurred by the rental unit will be written off on Schedule E. Payments for advertising, cleaning, management, etc. are completely deductible. In addition, repairs and capital expenditures will be subject to the final tangible property regulations which I briefly mentioned above.

You will also depreciate the rented part of your property, which is why accurately reporting basis is critical. Depreciation is a phantom expense that allows you to further shelter income.

You can also deduct shared expenses between the two units. Half of your property taxes will be deducted via Schedule E. A shared internet connection, garbage service, or lawn services are deductible. Repairs are treated similarly, so if you repair or replace the roof, you will allocate some of the expenditure to the rented unit.

Hope this helps. Don't do your own taxes.