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Landlords, Don't Mess on These Tax Considerations
According to the statistics published by the Government Accountability office (GAO), individuals mis-report their income from real estate activities more frequently than any other type of income. And the most common errors are relating to expenses. Here are some of the vital tax considerations if you are a landlord - 1. Landlord often report income received from monthly rental payments. However they need to report the expenses which are paid by the tenants and deducted from their rent. If the tenant provides any service, the fair market value of such service should be reported as income. 2. If you accept a security deposit and take some money out of that at the end of the lease (kept security deposits), this is your income and should be reported on the tax return. 3. If you spend on improvements of your property which will add to the value or extend the life of the property, like an addition of a bathroom or some new appliance, such investment needs to be depreciated over a number of years. It cannot be deducted in the year of making such investment. You should also depreciate the cost of your rental property over a number of years. Remember, land cannot be depreciated! 4. If you use the rental property for personal purposes during part of the year, the tax treatment is different. If you use the property more than 14 days in a year or at least 10 per cent of the number of days for the unit is rented, then the property is deemed as personal residence. In such a situation IRS allows you to claim interest up to $1 million. 5. If you make a late payment of taxes on real estate and due to such a delay you have to pay interest or penalties, these are NOT deductible as your expense. Many people tend to claim such expense and then end up with problems in tax audit. 6. You need to keep good record of all the expenses and you should note all the rental activities in a diary. You need to keep records separately for each property. If you allow the use of any of your properties to your family or friends, you need to keep a proper record of the dates. 7. If you use part of the property as your residence, or use the whole property as residence for part of the year, you need to apportion the expenses between rental use and personal use on the basis of number of days the property was used for each purpose. Also, you cannot report a loss on your real estate renting to set off against your other income. 8. If you want to claim a number of tax benefits associated with the renting activity, you must be involved actively in the management of the property. According to IRS, it means you should decide on the rents, make approvals of tenancies, and make decisions on the repair and improvements. You can take the help of experts but you should be in control. 9. When you buy a property, it is termed as "put in service". IRS assumes that from that date the property has a lifespan of 27 years. Even though the property is 100 years old and if you buy that property, this lifespan starts from the date of your purchase. It has nothing to do with its value in the market. Many landlords miss out on this point. 10. You should be careful while making a decision of selling your property in a short time. If you sell a property within one year of its purchase, you are liable to pay taxes on the entire gains you made in such a transaction. So you need to hold your property for at least a period of one year to get long term capital gains tax break. 11. If you go on buying and selling many properties in a year, you are considered as a 'dealer' by IRS. Try to avoid such a designation. You cannot get capital gains tax benefits if you are treated as a dealer. You cannot depreciate your property also, even though you hold it for a long period and all your rents are considered as ordinary income. To avoid this situation, many investors who buy and sell frequently do it through separate corporations or in limited liability companies. Chintamani Abhyankar is internet marketer, tax professional and freelance writer. He has done a lot of research on tax systems and is advising people internationally on various aspects of tax planning over last 25 years. His masterpiece, Stop donating your money to IRS is an e-book on the tax secrets which only lucky people knew in the past. His easy to implement strategies can put thousands of dollars in your pocket. Grab a copy now! Article Source:
http://EzineArticles.com/?expert=Chintamani_Abhyankar
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