All Forum Posts by: David Orr

I have opinions on this.   

Excel:  You can use Excel if you don't have many expenses, but it's a lot of manual work to enter transactions by hand that way.  

QuickBooks:  I think for normal people who aren't accountants, QuickBooks is not a good choice in my opinion.  It takes time to learn and configure it for rentals, it's just not nearly as good as a tool that is custom-built for managing rentals and rental finances.  Things get even more complicated when you have multiple rentals and you end up having to use class tracking to try to keep them separate.  It's messy and complicated.  One exception, if the rental is owned in a partnership, you should get a bookkeeper who uses accounting software like QuickBooks (or Wave!).

If you have a rental property, your life is so much easier if you use software designed for that.

Stessa is a great option.  Stessa is very good, but actually Baselane is my new favorite one to use.  Either of those are great options!

These apps make tracking the financing so much easier, plus they handle online rent collection (a necessity if you don't have a property manager!), auto-pay, automatic late fees, and reminders, lease signing, security deposit collection, etc. These rental apps do a great job of producing reports to track your rentals' performance, and output everything you need for tax filing.

David Orr
Tax Modern

The answer to this is yes and no.  You can start deducting depreciation and other expenses from the date the property is "placed in service", which is not the same thing as the date someone first books it.  A property is placed in service when it is available and able to be rented, and you have in some way advertised it for rent.  If both of those things are true, you can and should start depreciating it and deducting expenses related to it from that date.

But then you did say "deduct depreciation against my personal w2 income". By default, the tax loss from the rental can't offset your W-2 income because passive losses can't usually offset non-passive income. But there are a number of exceptions, including if your income is under $150k, real estate professional status, and the STR loophole. The STR loophole is the only one that can't apply in this situation because that one does require stays at your rental property in the year you use it.

So if you don't qualify for one of those, your tax losses would be suspended until they can offset future passive income.

David Orr

Are you saying you would plan to rent it out to renters for some number of years before you move into it?

It's true that "fair market rent" is a vague concept and there are a lot of factors involved.  But we know a fair amount about what you can and can't get away with on this topic, because there have been tax court rulings over this issue. 

You are allowed to consider things like the location, condition of the house, and even needing to reduce the rent because it's difficult to find tenants during a particular time of year.  And also this... the tax courts have allowed rent for family members to be discounted up to 20% under fair market rent because it's reasonable to accept a little less from a family member who might likely take better care of the house (reference: Bindseil v. Commissioner T.C. Memo 1983-411).  So there you go, that should make $1300 permissible if the fair market rent is $1600. 

David Orr
Tax Modern

The 1.469-5T(b)(iii) tax code that defines the material participation tests uses the word "individual".  Pretty much any time the tax code uses the word "individual", it means one human being (unlike "person", which usually includes other legal entities).  Having said that, I'm not aware of any tax court cases where that was challenged.  But I think it's safe to consider each cleaner as separate for counting their participation hours. 

David Orr
Tax Modern

I like that Kelly mentioned limiting your personal use of the property as one of the qualifications of the STR loophole. That's not usually mentioned as one of the qualifications, but it is good to be aware that if your personal use of the property is over the limit, then you can can't use it to create a tax loss, so the STR loophole wouldn't work.

But I would rephrase it because the "OR" in the sentence would make me think you can't have 15 days of personal use in any case.  I would maybe rephrase it as "personal use of the property cannot be more than the greater of 14 days or 10% of the total rental days".  That's still kind of a confusing sentence, but the point is that if you rented it out at least 140 days in a year, then you can use the 10% of the rental days number as your maximum personal use days. 

David Orr
Tax Modern - Tax prep/advising for rental real estate owners

Here are some popular options that have good reviews:

https://clockify.me/

https://toggl.com/track/

https://repstracker.com/

REPS Tracker is interesting in that it's specific to REPS, but it seems like of silly to have to pay $30/month for such a simple app.  I would probably use Clockify.  

By the way, tracking your time to qualify for REPS is usually the easier part to qualify for if you work full time in real estate.  But you also have to track your material participation time in your property(s) if you're trying to qualify to use your real estate tax loss to offset your other income. 

In my opinion, if you aren't already using QuickBooks, I wouldn't recommend QuickBooks for rental properties unless you already know how to use it and just want to us it, or if you own the rental in a partnership (and need to file a 1065 partnership return).  And even then, if you want to use this type of business accounting software, Wave is perfectly adequate for everything you need to do for rental property accounting, and it's free (for what you need for rentals).

For most rental property owners, you can use personal finance software (Simplifi, Quicken, etc.), or you can use rental-specific software (Stessa, Rental Hero, etc.).  All you need the software to be able to do is keep track of your total rent income for each property, and your total expenses for various expense categories (utilities, repairs, etc.).  Especially if you are collecting rent yourself, I would probably go with something like Stessa since it handles rent collection, lease signing, and lots of other property management tasks, and accounting all in one platform.  Something like that is easier to use for rentals, and does a lot more. 

Just to clarify so no one misreads that, short term rentals still go on Schedule E in most cases.  Substantial services are the only deciding factor on whether a rental should go on Schedule C, and that's pretty rare (only if you provide meals, entertainment, or daily cleaning during a guest's stay). I'm not sure if the original post is a short term rental (but if so, by the way, you also have to depreciate it over 39 years instead of 27.5).  

About the cost basis, it's based on the original purchase price, but you also have to subtract out the land value.  TurboTax does prompt users to enter the land value, and it will subtract it for you, so hopefully that's already correct as long as you had the right values to enter for that.  County tax appraisal information is an acceptable way to find out the ratio of the land value to the improvement (building) value, and then you can multiply the original purchase price by that ratio to get a reasonable estimate of the land and improvement values.  You can also add costs for any significant improvements that you've made since you bought it if you have records of that.  When you enter all that info for the basis, be sure that the software is depreciating it from the date it's in service as a rental (not your original purchase date). 

The renovations to get it ready may be considered repairs or improvements, and those are handled differently depending on if it's a repair or an improvement.  Improvements would generally have to be depreciated, except improvements under $2,500 can be expensed in the current year if you make the "de minimis election" on the return. But you still can't expense costs that are made before the date the property is available for rent... But then there's an exception to that where you can expense up to $5,000 in startup costs that happened before it is available for rent (additional startup costs above that amount have to be amortized).  And really, you may not actually want to try to expense things in the first year anyway because you likely will just end up with a passive loss that you can't use this year anyway, unless you qualify for one of the exceptions to that. 

If that sounds complicated, that's because it is, and it's hard to summarize all the specifics of how to best handle that in a forum post.  That's sort of a rough overview, but I'm still glossing over a lot of details.

Yes, you have to count them in the average if you have a medium or long term tenant.  When you include the medium term tenant, that doesn't push your average over 7 nights?