Individual Taxation - Schedule E

Question 1

Schedule E

Answer 1

Rent, Royalties, Flow Thru, Estate and Trusts

RRFET

Question 2

Rental Income

Answer 2

Non-refundable deposits
Improvements made in lieu of rent
Prepaid Rent
Lease cancellation payments

Question 3

Not Rental Income

Answer 3

Refundable deposits

Improvements not made in lieu of rent

Question 4

Deductible Rent Expense

Reported on separate lines on Sch. E

Answer 4

Taxes
Mortgage Interest
Utilities
Depreciation
Condo fees
Leasing Commissions
Professional/Management Fees (lawyer remove tenant)
Repairs/Maintenance

Question 5

Vacation Home

Answer 5

Dwelling other than a primary residence used for recreational purposes at certain times. Sometimes rented out when not in use.

Question 6

Rent out house for 14 days or fewer during year

Answer 6

No report of rental income
Considered a personal residence
- mortgage interest and property taxes are deductible

Question 7

Rent out house for more than 14 days

Answer 7

Report rental income (landlord in eyes of IRS)
Deduct rental expenses
Must allocate costs between time used for personal and rental

Question 8

Use house for more than 14 days or
More than 10% of # of days rented

GREATER OF

Answer 8

Considered a personal residence
Deduct rental expenses up to level of rental income
Can’t deduct losses

Question 9

If Personal use is limited to 14 days or fewer or

10% of # of days rented

Answer 9

Considered a business
Deduct rental expenses
Deduct up to $25,000 in losses each year (depending on income)

Question 10

fix-up days don’t count as personal use

Answer 10

(many vacation homeowners hold down “leisure” use and spend lots of time “maintaining” property)

Question 11

Qualified Expenses that are deductible on any home

Answer 11

a. Real Estate Taxes
b. Mortgage Interest
c. Casualty Losses

Question 12

For Vacation Home, however, expenses must be allocated and broken down between

Answer 12

a. Schedule A (itemized deductions/personal); AND

b. Schedule E (Rental Expense)

Question 13

If one does rent out home, there are limitations as to how long the owner can reside there and still

Answer 13

Deduct Rental expenses

Question 14

Vacation Home Mortgages have higher interest rates than mortgage on primary residences because:

Answer 14

a. Higher risk of default (reversal of fortune, individual more apt to save their primary residence than a temporary one)
b. Nevertheless, most perks of Home Ownership still apply, though restrictions are tighter for vacation homes.

Question 15

Sale of a Rental - not allow the same tax deductions as

Answer 15

Sale of Primary Residence

Question 16

Schedule E deductions may not exceed

Answer 16

Income from the property

Question 17

In trying to combat Tax Shelters, Congress has asked the IRS to enforce several different layers of Rules, including

Answer 17

PAL Rules

Activity Rules

Question 18

Different Income Categories:

Answer 18

a. Active – Wages, Salaries, SE Income
b. Portfolio – Royalties, Interest, Dividends, Capital G/L
c. Passive – Trade or Business in which TP does not “Materially Participate”

Question 19

Passive Activities affect what types of entities, trades, and business’s?

Answer 19

	All Rental Activity
	Individuals
	Closely held C-Corp
	Personal Service Corp
	Partnership Interests
	S-Corps
	Limited Liability Entities

Question 20

Passive Activity Rules do not apply to a Trade or Business where TP doesn’t

Answer 20

“MATERIALLY PARTICIPATE”

Question 21

Material Participation Defined

Answer 21

Regular, continuous substantial involvement in a Trade or Business

Question 22

Most Common Test that a TP can use to meet the “Material Participation” standard:

Answer 22

500 hrs

Question 23

Passive Activity Losses are recognized only

Answer 23

To offset income from Passive Activity Income; OR

When the interest in Passive Activity is disposed of in a Taxable Transaction

Question 24

Rental Loss Exception for PAL

Answer 24

Rental Activity that is “Per Se” Passive (if rent, it is passive no matter what…)

“Material Participation Test” doesn’t apply

Question 25

Exception to Rental Loss Exception

Answer 25

Individuals who ACTIVELY participate in Rental Activity may deduct up to $25,000 of Losses against Active or Portfolio Income

Congress carved out this exception to the Regular Rental Exception Rule for small individuals

Question 26

Deductible Rental Loss Example

Answer 26

There is active participation by an individual who engages in Passive Rental Activity
Incurred Rental Loss of $15,000
Has AGI less than $100,000
Can deduct the $15,000 from $100,000

Question 27

Deductible Rental Loss Phase out

Answer 27

a. Reduced at a rate of 50% of AGI over $100,000
b. Completely phased out at $150,000

*just know ballpark amounts

Question 28

Active vs. Material Participation

Answer 28

Active not as Stringent
Active TP must participate in “Management

Decisions”

a. Approves new tenants
b. Approves rental terms
c. Approves Repairs

If meet Active Participation, will allow you to claim losses up to the $25,000 if you meet the exemption threshold

RE agent can still go out and advertise and bring in tenant without destroying Active participation.

Question 29

Real Estate Professional Exception

Answer 29

Individuals considered RE professionals are not bound by PAL rules

More than ½ of personal service performed during year are RE business which TP “Materially Participates”

TP works 750 hours annually in that same RE business

Question 30

At Risk Rules

Answer 30

Losses from Business operations are limited to the amount of money that a TP can actually lose in the particular activity that is going on.

Question 31

At Risk Rules apply to:

Answer 31

a. Schedule C (Businesses)

b. Schedule E (Rental Activity)

Question 32

Amount that a TP has at Risk:

Answer 32

Cash invested in venture

Adjusted basis of any property invested

Recourse debt – lender has recourse against debtor

Non-recourse debt if secured by Real Estate