Real Estate Services

Investments in real estate can offer several unique tax saving opportunities, but also present pitfalls for the investor to be wary of. Taking advantage of the opportunities requires proper planning, but the benefits of executing the plan, in terms of tax savings, can be significant. Tax Muscle can help you develop and implement your plan so you can unlock the full earnings potential of your real estate investment.

Residential Rental Real Estate

Rental Income. Gross rental income in general includes all amounts received as rent for the use or occupation of property. It is not limited to amounts received as normal rental payments. Most taxpayers report rental income and deductions under the cash method, meaning rental income is included in gross income when the taxpayer constructively receives it, regardless of when it was earned.

Rental Expenses. In general, expenses of renting property, such as maintenance, insurance, taxes, depreciation, and interest, are deductible even if the deductions exceed rental income. The expenses may be deducted for the days the property is available to be rented. Certain exceptions may apply if the property is also used by the taxpayer for personal purposes.

Capital Expense vs. Repair

In general, an expense for repairing or maintaining rental property may be deducted as a current expense. In contrast, an improvement made to rental property must be capitalized, with the cost being recovered through depreciation, or as part of the basis when the property is sold. Incidental repairs and maintenance of property are not capital expenditures and are deductible as current expenses. However, to the extent the expenditure results in an improvement, betterment, restoration, or adaptation, it must be capitalized and not deducted as a current expense. Tax Muscle can help you make the distinction and create policies that support your tax positions and protect you from audit.

Sales and Exchanges

Sale. A sale is a transfer of property for money or a mortgage note, or other promise to pay money. An exchange is a transfer of property for other property or services. A gain is the amount that a taxpayer realizes from a sale or exchange that is more than its adjusted basis. A loss occurs when the adjusted basis is more than the amount realized on the sale or exchange.

Nontaxable Exchanges. Certain exchanges of property are not taxable. This means any gain from the exchange is not immediately recognized and any loss cannot be deducted. The taxpayer’s gain or loss will not be recognized until he or she sells or otherwise disposes of the property received in the exchange.

Vacation Home Rules

If a taxpayer has any personal use of a dwelling unit (including a vacation home) that he or she rents, he or she must divide expenses between rental use and personal use. Rental expenses are deducted on Schedule E (Form 1040), and personal expenses are nondeductible, except those otherwise allowed as itemized deductions on Schedule A (Form 1040) (property taxes, mortgage interest, and certain casualty losses). A dwelling unit can be a house, apartment, condominium, mobile home, boat, vacation home, or similar property with living accommodations, such as a sleeping space, a toilet, and cooking facilities. A dwelling unit does not include property used solely as a hotel, motel, inn, or similar establishment where the owner does not use it as a home during the year. Tax Muscle can apply the vacation home rules to determine whether and the extent to which you may be entitled to a deduction for renting real estate that you have also personally used as a dwelling unit.

Passive Loss and At-Risk Rules

If a taxpayer has a loss from rental real estate activity, two sets of rules may limit the amount of loss that can be deducted, These rules must be considered in the following order:

1. At-risk rules. The at-risk rules are applied first if there is an investment in the rental real estate activity for which the taxpayer is not at risk. This applies only if the real property was placed in service after 1986.
2. Passive activity limits. Generally, rental real estate activities are considered passive activities and losses are not deductible unless there is income from other passive activities to offset the losses. Disallowed deductions are carried over to the next tax year and treated as a passive activity deduction for that tax year. However, there are exceptions.