All Forum Posts by: Keith Barton

I apologize - part of my 1st post was INCORRECT.

I neglected to take into account the different rules for renting out a property that is also used for personal use: in this case, renting a portion of the property that is your main home.

IRS Publication 527 discusses both situations: residential rental property that is not used for personal purposes; and, residential rental property that is also used for personal purposes.

In this scenario (using property both as your home and as a rental property), you cannot deduct rental expenses (including depreciation) that exceed the amount of rental income. However, you can carry forward any excess (including depreciation) expenses to future years.

To figure your expenses in this situation, you would apportion the expenses based on the ration of rental use and personal use. As Ken mentioned, if you apportion 67% of the home to rental use and 33% to personal use - then 2/3 of the mortgage interest would be classified as a rental expense and 1/3 of the mortgage interest would be listed on your Schedule A (if you itemize deductions) - same for real estate taxes, etc.... Again, depreciation would have to be apportioned accordingly.

Again, I apologize for the inaccurate information the first time I posted.

Nathan - if you paid $0 what was the consideration to acquire the property?

Whatever consideration you paid was the purchase price of the real property, personal property (if any), and any accounts payable/receivable - unless those were explicitly excluded from the purchase.

Therefore, if the purchase price came with the security deposits, and the security deposits (or any portion thereof) do not need to be refunded, they may not be income to you.

It may be possible that those funds will adjust your cost basis. It may be possible that those funds are compensation for fees/services rendered. It may be possible that the money is classified some other way.

Just because the money is new to you doesn't necessarily make it taxable income.

btw - when income is realized depends on your accounting method. If you use cash accounting, income is reported as of when it is actually received by you and expenses are reported as of when they are actually paid by you. If you use accrual accounting, income is reported when it is obligated to be paid to you (whether or not it is actually paid - if it is not paid, it gets deducted as writing off bad debt), and expenses are reported whenever you are obligated to pay them (again, whether or not you actually paid it - however, if you never pay it, they can't be used as a business expense to offset income.)

How much of what the tenant has told you is really believable? I'm not suggesting the tenant is lying 100%; however, from what I have heard (admittedly very little) I get the impression this tenant may exaggerate things or blow things out of proportion to what he perceives is his benefit. If that is the case, it doesn't surprise me at all that no flies were caught on the tape. He may have had a few at various times, but not nearly as bad as he makes it sound. I have seen infestations of these flies and their larvae - I'm not expert, but I find it difficult to believe there would be 30 flies from any drain....

Each profession has very specific ethical rules that govern members of the profession. In some professions or jurisdictions, simply going inactive may not be enough (I'm not suggesting this is your situation - I don't know.)

My point is that you should read very carefully any/all ethical rules governing your profession(s). I know you are looking for an answer more quickly and more easily than taking the time and effort to read all the ethical rules (I understand, I wouldn't want to read all that stuff either); however, if you are concerned about your certification(s), you owe it to yourself to be secure in your knowledge of the situation - which means seeing for yourself what the rules require/allow. Good luck with your decision.

When you have rental property you file Form 1040 Schedule E to report your revenue, expenses and depreciation.

Your revenue will be the rental income. Your expenses will be the utilities, real estate tax, mortgage interest, etc....

Your depreciation will be based on the value of the home.

Why do you say your disposable income will not change? You are getting $1050 per month you were not otherwise getting. You may say you have the additional expense of a home: OK, but you also have the additional value of a home. I'm not trying to be flippant - just pointing out that you do have much value.

In any event, the depreciation expenses are most likely going to mean you report negative income on your tax return and will actually pay less taxes. You said your income will be $1050 and expenses will be $1000? Do those expenses include real estate taxes and mortgage interest? That amount certainly does not include depreciation. Once you factor all of that in, you will see that depreciation will cause you to show a loss for many years. As long as you don't have too much income (somewhere around 100k it starts affecting you if I remember correctly), you can take up to $25k loss from your Schedule E. When you sell the property you will have to "give back" the depreciation you previously took, but it will help you for now....

Can't recommend anything with regards to FL statute (haven't looked at it); but, does your lease say anything about this?

In Ohio most landlords I know will enter the premises to show the unit AFTER giving reasonable notice - just like one gives reasonable notice before entering premises to repair something or inspect something.

Also, I have recommend to a landlord that as long as they have an inspection clause in the lease, the landlord can enter to inspect the premises with a potential new tenant/buyer.

Paul - maybe I am misunderstanding something; so, let me review what I do know:

In my post above, I asked if you had any citations to support your statement. Please understand, as an attorney and as someone who works with tax matters, I always like to see authoritative sources before making any definitive conclusions. Thank you for the citations you provided. However, none of the cites are authoritative. By authoritative, I mean information that can be used to reasonably justify taking a certain position. I wouldn't expect anyone to cite case law, or even statutes, in a forum such as this. I realize I did not ask for authoritative cites; however, I would prefer to see official IRS documents for something like this. Cites to other forum posts or even articles carry no authority - but they do at least provide more information. In addition, anytime anyone starts talking tax law/implications, etc... there are lots of opinions (some accurate, some woefully inaccurate) I strongly recommend that anyone discussing a tax issue should refer to IRS documents or tax cases for justifying any position.

I also asked how this situation (meaning the situation Tom described in the original post) was different from the scenario I provided a link to: IRS Publication 523. The reason I asked is that I could see no difference between Tom's situation and the situation described in Pub 523. The situation described in Pub 523 specifically states the homeowner CAN exclude from income any capital gains from the sale of the home. However, maybe I misunderstood something, so it's always good to clarify. I did not see that question addressed in your subsequent posts.

The information you linked to describes how the law has changed to affect a situation different from Tom's situation.

As I understand Tom's situation - he bought the home, will then rent the home, then sell the home. Under this situation we look at the 5 years immediately before the sale. If Tom:
1) owns the property for at least 2 of those 5 years;
2) lives in the home as main home for at least 2 of those 5 years;
3) and there was no rental use of the home BEFORE Tom starting living in the home as main home (in the 5 year period)

He CAN exclude all capital gain (assuming other conditions met.)

HOWEVER, in the 5 year period before the sale of a home, if someone:
1) owns the property for at least 2 of the 5 years;
2) lives in the home as main home for at least 2 of the 5 years;
3) and there was rental use of the home BEFORE starting to use as main home (in the 5 year period)

He CANNOT exclude all capital gain (the portion of capital gain attributed to the rental period before being used as a main home must be included in income)

AGAIN See IRS Publication 523.

Please let me know if there is anything I misunderstood about this situation.

Generally speaking, when a grantor transfers a home to an irrevocable trust, the grantor loses the ability to deduct the cost of real estate taxes and mortgage interest. However, there are exceptions, but you will need to obtain advice from a qualified professional in your area.

Also, while a bank cannot call due the note when a grantor transfers real estate to a revocable trust - the bank CAN call due the note when a grantor transfers real estate to an IRREVOCABLE trust.

Not saying what you want cannot be done, you will have to consult a professional to determine what can or cannot be done and what constraints apply for any given situation....

What kind of trust Michael? The answer to your questions depend on the type of trust. If it is a revocable trust you keep the interest deductions and can avoid probate (at least for the house, and at least if all is done properly with the probate avoidance kept in mind as a goal.) If it is a land trust, you lose the tax deduction for mortgage interest. If it's an irrevocable trust I'm not sure off the top of my head and its too late to look up tonight....

I agree with Dave as far as not enough information to tell.

The answers given above vary, 1 may be correct for you, a couple may be correct for you, they all may be wrong for you - can't tell if they apply to your situation or not....