Unit 9: Rental and Royalty Income Flashcards
Amounts received as rent must be included in:
gross income
Rental and royalty income is reported on:
Schedule E, Supplemental Income and Loss
Property owners can __ the __ of managing, conserving, and maintaining their rental properties
deduct; expenses
Advanced rent must be included in:
the year received
If a tenant pays to cancel a lease, the amount received is what type of income? When is the payment included?
rental income; in the year received
When is a refundable security deposit not considered income?
if it is refundable at the end of the lease
When is a refundable security deposit considered income?
it is income the year the deposit is forfeited by the tenant
Treatment of insurance premiums paid in advance
If the premium is paid for a policy period of more than one year, only part of the premium applied to that year can be deducted
Rules for local benefit taxes
Charges cannot be deducted if it increases the value of the rental property, only taxes for maintenance or repair, or interest charges related to financing its construction
Property or services received in lieu of rent must recognize the ___ as rental income unless there is:
FMV; agreed-upon price
If a tenant pays expenses on behalf of the taxpayer, the taxpayer must:
recognize as rental income the amount of rent received in cash and the amount paid for the repairs; however, he can deduct the expenses as rental expense
What are the rules for vacant rental property?
You cannot deduct the loss of rental income for the period the property is vacant. However, if you are actively trying to rent the property, you can deduct ordinary and necessary expenses as soon as the property is “made available” for rent.
A taxpayer begins to claim deductions for depreciation of a rental property when he:
places it in service for production of income
Depreciation ends when a taxpayer has:
fully recovered his cost or other basis, or when the property is retired from service, whichever happens first
Three basis factors that determine how much depreciation a taxpayer can deduct:
basis
recovery period of the property
depreciation method used
Most residential rental buildings are depreciated over
27.5 years
Most nonresidential buildings are generally depreciated over
39 years
For a personal home that is later converted to rental property, the depreciable basis is:
the lower of:
the adjusted basis in the property, or
the fair market value of the property at the time of conversion
What is the maximum Section 179 deduction in 2019?
$1,020,000
Tax treatment of repairs vs improvements to rental property
the cost of repairs to rental property can be deducted
The cost of improvements are depreciated over time separate form the asset or property being improved
What is an “improvement” of rental property?
anything that results in the betterment of property, restoration of property, or adaptation of a property to a new or different use
What is the de minimis safe harbor rule of tangible property rgulations
you can elect to expense tangible property costing no more than $2,500 per invoice or item in the year they are used or consumed
A trade or business activity is considered a ___ activity, if the taxpayer does not ___ in it
passive; materially participate
What is the rule on passive activities?
you cannot deduct losses from passive activities to offset nonpassive income
Rental activities that require substantial services along with the rental property may be classified as ___; The rentals and expenses are reported on ___ subject to __ tax
business activities; Sch. C, Profit or Loss from Business; Self-employment
What is the Special $25,000 Loss Allowance for Real Estate Rental Activities?
you may be able to deduct $25,000 of losses against non-passive income if you actively participate in a rental real estate activity
losses that can’t be deducted due to certain limitations can be carried forward indefinitely
To be considered “actively participating” in a rental activity, a taxpayer must:
own at least 10% of the rental property and
make management decisions in a significant and bona fide way
The full $25,000 loss allowance is available for single or MFJ taxpayers where their modified adjusted gross income is:
$100,000 or less
How is the special allowances for rental losses applied to married taxpayers who file separate returns?
If you file a separate return but lived apart from your spouse for the entire tax year, the special allowance losses cannot exceed $12,500 and this allowance is available if your MAGI is $50,000 or less.
If you lived with your spouse at any time during the year and file separate, you cannot use the allowance to offset nonpassive income
What is the rule for rental loss allowances for MAGI exceeding $100,000?
for every $2 by which the MAGI exceeds $100,000, the allowance is reduced by $1; If the MAGI is $150,000 or more ($75,000 MFS), it is fully phased out and must be carried over
You file jointly with a MAGI of $140,000 and you have rental losses from residential property of $25,000. You actively manage the property, how much can you deduct against your nonpassive income? How much can you carry over?
140,000 - 100,000 = $40,000
40,000 * 0.5 = 20,000
$25,000 - 20,000 = $5,000 deduction
$20,000 carry over
Two most common methods of dividing expenses used for renting only part of a property
number of rooms in the house and
square footage of the house
you own a duplex with two units of the same size and you rent out the other. You paid $12,000 mortgage interest and $4,000 real estate taxes for the entire property. How can you deduct the expenses?
$6,000 of mortgage interest and $2,000 real estate taxes can be deducted on Schedule E. While the other $6,000 and $2,000 attributable to your personal use of property can be deducted on Schedule A as itemized deductions
If you own a partial interest in a rental property, you can deduct expenses paid according to:
percentage of ownership
When a taxpayer has a residence that is used personally at certain times and rented out at other times, he must divide his expenses between ___; rental expenses are generally no more than a taxpayer’s ____ multiplied by
rental use and personal use; total expenses
a fraction whereby the:
numerator: total number of days actually rented at a fair rental price
denominator: total number of days the dwelling is used
If a taxpayer uses a property for both rental and personal purposes, the tax treatment of expenses depends on ___.
It is considered as “residence” if:
whether his personal use is considered as “residence”;
he uses the property for personal purposes during the year for more than greater of 14 days or 10% of total days it is rented at a fair rental price.
For purposes of partial rental activity, where the property is used for both rental and personal purposes, days of personal use are counted when:
a member of the TP’s family uses the property without paying a fair rental price
anyone uses the property at less than fair rental price
use of the property is donated to a charitable organization
renting a dwelling unit that is also used as a residence during the year is not considered a ______, therefore if his rental expenses are more than rental income, he:
passive activity; cannot offset loss from other sources of income
If you do not rent the property with the intent to make a profit, you:
cannot deduct rental expenses exceeding the rental income
What does renting “not for profit” mean?
it means renting below fair market price
Where and how do you report rental activity that doesn’t have a profit motive (1) and where do you report the rental expenses (2)?
- Form 1040 as “other income”
2. Sch. A
What is the 15-day rule?
if a taxpayer rents a main home or vacation home that is considered “residence” for fewer than 15 days, he does not have to recognize any income as taxable nor cannot deduct any rental expenses. This is also called the minimal rental use.
What is the rule for a person qualifying as a real estate professional regarding losses from rental real estate?
losses from real estate activities in which he materially participates are not considered passive and are fully deductible
To be classified as a real estate professional, you mus:
provide more than 1/2 of total personal services in real property trades or businesses in which you materially participate and
perform more than 750 hours of services during the tax year in real property business activities
Operators of hotels, boarding houses, and bed and breakfasts must report their income on ___
Schedule C, Profit or Loss from Business
Renting out all or part of a house can be classified for tax purposes as the equivalent of running a bed and breakfast. The facts and circumstances of each situation must be taken into account to determine if the taxpayer is:
providing “substantial services” to a tenant
Royalty income is reported on:
Schedule E, Supplemental Income and Loss
If you are self-employed writer, musician, or inventor, income is reported on ___ and subject to ___
Sch. C; self-employment tax
How are royalty payments reported to the taxpayer?
On Form 1099-MISC, Miscellaneous Income
A business is required to issue Form 1099-MISC to each person to whom has has paid at least:
$10 of royalties for the year
If an owner makes rental property repairs before placing the property into service, the repairs must be:
capitalized and included in the property’s basis
