All Forum Posts by: 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?

Hey @Sammy Habbaz.  Yeah, this may be an area where there isn't just one right answer.  It would be interesting to talk about it some more and get into some of the nuances of it.  I messaged Michael Plaks, and I'll send you a message also. 

Hi Sammy. Thanks for reply. A couple quick notes on the things you mentioned. 

1. True.  I didn't go into much detail about the specifics, but I just described the PIS date as "made available to rent".  But yes, it has to be ready and available to rent, and advertised in some way.

2. This is actually an interesting topic that I've actually went down quite a rabbit hole of researching recently, and it gets complicated.  Some of the most prominent names in tax accounting seem to have diverging opinions on the issues surrounding this.  Maintenance and repairs are treated differently than improvements under the Repair Regs, but there may be some confusion about how repairs and maintenance should be treated before a property is in service.  But aside from that, what seems to be even less settled is whether the de minimis safe harbor be used to qualify small improvements (under the $2500 limit) during the startup phase to help qualify what expenses can be included in section 195 startup expenses (and then either deducted as part of the $5000 startup allowance, and the rest amortized over 15 years).  It could be interesting to dive into a discussion about this in another thread.

3. Similar to the above, deductibility of interest and real estate taxes before the property is placed in service is a topic of some uncertainty.  I think the safe and conservative choice is to not.  But I have seen arguments that say it could be allowable and I think it could also be interesting to dive into that in another thread.