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February 10, 2009
Rental taxes and deductions
Folks,
wanted to see if anyone had some thoughts on rental income and deduction questions as they relate to tax returns.
Situation is - we have a 2 family building which has three floors, the top one we rent out.
1) Is it correct to deduct 1/3 of utility costs ? GAS / Electricity and water
2) Understand that some repairs are deductible. We have had the hallways replastered which covers the main entrance and up the stairs, plus tenents hallway. I'd think that would be 100% deduction and not 1/3 deduction as it's all in tenants area.
3) Lead water main replaced. We weren't clear how or if we should split the % of this repair but do believe it could be a deduction.
Appreciate anyones' advice on the above.
Also - can Brownstoner.com add spell check please !
Comments
My advice is talk to a CPA and have your taxes professionally done. Yes I am biased in this regard, but the fees are incidental to the clarity and value they will bring.
All of the things you mention are deductible to one extent or another.
Posted by: newsouthsloper at February 10, 2009 8:48 AM
You must consult with an experienced tax preparer on this stuff....
Posted by: bricktop at February 10, 2009 8:59 AM
Generally speaking, I deduct the pro-rated % of all expenses that are "house" related, including utilities, plantings/garden, hallway and basement, repairs etc. as I think I can justifiably say it benefits the tenant by that %.
Use firefox, the comment entry has built-in spell check
Posted by: cmu at February 10, 2009 9:02 AM
Yes, consult with a good accountant on this one. Lots of other stuff you can deduct against rental income: a portion of your liability insurance, a portion of your mortgage (although you can't deduct the rental portion agaisnt rental income and deduct that same portion again as part of your regular itemized deductions. Some stuff (certain renovations) gets amortized, some you can take all in one year. Have your accountant review with you all the thigns that are deductible. Utilities are tricky -- are you providing heat? You can't take 1/3 of electricity if they have their own separate billing. If you supply heat you can spluit whatever fuesl the boiler. If you supply hot water, same. Same with water and sewer charges. Etc.
Posted by: slopefarm at February 10, 2009 9:26 AM
I, too, think it wise to hire an expert to help you work through this, particularly for the first couple years. You will most likely make your money back, and then some.
To answer your questions, though, and bearing in mind that i am not an expert: Repairs made to the rental unit (ie, new lightbulbs, mousetrap, etc.) can be deducted 100% off of your rental income (but not as against your salary income). Longer-term improvements (new water main, plasterwork, kitchen cabinets, etc.) attributable to the rental are depreciated on 27.5 yr schedule, again, only as against the rental income, not salary income. If the improvement relates to the whole house (like the water main), you'd only depreciate 33% of the overall cost, in your case, if you're using the 1-of-3-floors-is-rental metric. But rather than use the 1/3 metric, you could potentially be better off going with a per-square-foot metric. Depends on your mortgage interest, rental income, and many other factors.
1/3 of gas, water sounds right. Electricity might be different if they pay their own electric bill.
Posted by: brooklynrulz at February 10, 2009 9:35 AM
You should contact the accountant for Rangel and Daschale - then you definitely won't have to pay any taxes.
Posted by: jnjnjn2 at February 10, 2009 9:48 AM
Go see a professional. Tax laws change from year to year. They will also be able to tell you what this years red flags are.
Posted by: IMBY at February 10, 2009 9:51 AM
As 1/3 of your building is a business, then 1/3 of expenses that relate to the business is deductable. If you heat all three floors and get one bill (all heating on one meter) then 1/3 of the bill is deducatable. However Electric is usually seperately metered and all you may be providing to the (buisness) rental is hallway lighting and outdoor path lighting - therefore a percentage less than 1/3 (say maybe 10-20% of the total bill).
If the rental benefits from the repair it is deductable: repair a faucet in their apartment - they benefit 100% - deduct 100%. Replace a light in a common hallway or an outdoor light that benefits you both equally - deduct less. Calculate the percentage based on what percent is part of the business of the rental.
Also see last weeks post:
http://www.brownstoner.com/forum/archives/2009/02/accountant_2.php#comments
Posted by: SenatorStreet at February 10, 2009 11:01 AM
Please, do NOT use any tax advice given here in preparing your returns. While some is correct, some is clearly not. You need to contact an accountant. Both the IRS and NY State are increasing audits starting 2009; much of the increase will target self-employed and business owners, including specifically rental landlords. Telling an auditor that you did what you did because some guys on a blog or chatroom told you to will not help your cause. The preparation expense wont be terrible, and it is deductable (the accountant will confirm that).
Posted by: saminthehood at February 10, 2009 11:49 AM
Use Firefox, it has a built in spell checker.
Look under Preferences -> Advanced -> General for the "check my spelling as I type" option.
I don't know abut taxes, except that the "consult a professional" line is probably on point.
Posted by: serpentor at February 10, 2009 12:58 PM
You make sure you deduct everything and let those stupid renters pay all the taxes. How dare they live in your house and expect you to pay taxes.
Posted by: hannible at February 10, 2009 4:25 PM
yup hannible, that's how it is. The guvment encourages home ownership, and especially, business creation. Don;t like it, buy a house or start a business.
Of course the OP could just stick the rent money in their pocket and not pay any taxes at all.
Posted by: denton at February 10, 2009 5:38 PM
No problem with that denton as long as homeowners stop begging Washington for my tax dollars to help them refinance. Homeowners start raising your rents because Mayor Bloomberg is not giving out 400 dollar checks next year. If you are a "homeowner" and you desperately need a 400 dollar check then you should think of renting.
Posted by: hannible at February 10, 2009 10:04 PM
I agree with the others. Hire a professional and also read the IRS publication on residential real estate. It has a number something like 527. It is must reading. I understand that the IRS has been auditing lots of people who are taking deductions for RE incorrectly. After all, there's 2 wars to finance. Good Luck.
Posted by: DSutphin at February 10, 2009 11:20 PM
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