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August 13, 2009
Taxes and Rental Expenses
As a building owner living in the building, how does your rental income and building expenses figure into your tax picture? Let's say the mortgage was paid off and the two rentals brought in 24k a year and the total building expenses (heat/insurance/water/misc repairs/etc) was about 24k a year too, how are you taxed on that rental income? How do the building expenses figure into the tax picture? I'm a total newbie on this and no tax whiz, so feel free to school me. I'll invariably consult a lawyer, but I figure many of you probably are quite familiar with the subject. Thanks!
Comments
You really need an accountant, not a lawyer. All of the expenses of the building (other than those for your own unit) should be prorata against the income. If it's a 3 unit building and you rent 2 units, then 2/3 of the mortgage, taxes, heat & water are charged against the income. That is if each unit is similar size. If one is mych smaller, a rough calculation of the % of total sq. ft. will work. Just be consistent.
Additionally, you amortize the cost of the building plus any capital upgrades pro rata against the units as well as "depreciation." I can never remember the number so ask your accountant but I think it's 26.5 years that you divide the total cost and amortize it against the units pro rata. That calculation you really need to consult with an accountant. There will be an accounting loss given the amount of depreciation and, based on your regular slary income , you may or may not be able to take that loss. Again, it seems you need an accountant. I use one upstate if you want a recommendation. He'll likely do your whole return for $500 depending upon other issues.
Posted by: daveinbedstuy at August 13, 2009 8:37 AM
Speaking from experience, a good accountant is key. Dave's analysis above is good.
You deduct repairs right off the top but amortize the proportion of the purchase price that's rented (say two thirds in above example) over that time frame. But remember when you sell you owe cap gains on the difference between that reduced amount and the new purchase price.
Unless you take over the whole building for a few years and then it's waived.
A good accountant will pay for themselves several times over.
Posted by: Johnny at August 13, 2009 9:20 AM
I also recommend filling out an RPIE form even though you don't have to. For one thing it helps you organize your outlay & for another it can have an impact on taxes for the following year.
Posted by: Arkady at August 13, 2009 9:59 AM
"I'll invariably consult a lawyer"...sooo New York. Why would you need a lawyer for tax issues? An accountant could do this as he's entering data into his tax program.
Note that the depreciation is not on land, so you have to deduct land value first. So if you bought the house for 1m, maybe you can depreciate 2/3 of 600k etc.
If you want to get a rough estimate, on a newly bought house, you'll definitely be getting a negative 'income', ie a tax write off, probably about up to 8k in your case.
When you sell, you can defer tax on cap gains by doing a 1031 exchange, which is you buy a 'like' property (ie another with rentals); be aware there are very stringent timeframes on this, which with the typical NY re timeline uncertainity may be a problem.
Posted by: cmu at August 13, 2009 10:08 AM
get a copy or printout of a Schedule E - which is what has to be filed for rental income and expenses.
There you will see what and where to put your expenses, income and depreciation.
Any profit or loss shown on schedule E then goes on Line#17
on the 1040 form.
Posted by: Petebklyn at August 13, 2009 10:28 AM
Dave why would you want to Schlepp upstate for an accountant?
Posted by: brickoven at August 13, 2009 11:44 AM
brickoven -> no need to meet with an accountant - fedex and telephones work these days.
Posted by: SenatorStreet at August 13, 2009 12:32 PM
I always meet with mine
Posted by: brickoven at August 13, 2009 12:41 PM
Like Senator says, no need to meet over tax issues. That said, he is one of my best childhood friends and we do meet at least once a year but NEVER around tax season.
Posted by: daveinbedstuy at August 13, 2009 12:54 PM
I am in a similar situation - live in one unit rent out the rest and I use Tax Cut software and it has everything I need. Just enter in all your income and expenses, the percentage of the building rented out and what you paid for the property and it does all the calculations for you. If you are concerned, when you are done, have the accountant look over your work.
Posted by: JoeBushwick at August 13, 2009 1:36 PM
I will respectfully agree and disagree with some of the above. For preparing your financial records and providing general financial advice a Certified Public Accountant is well worth the money. For dealing with landlord - tenant issues, you'll need a real estate attorney well versed in the L/T law from a landlord's perspective. For taxes, I recommend using a tax attorney for the following reason: if the IRS or NYS Dept Taxation and Finance ever have a problem with your tax returns, you can direct them to your lawyer. You have a constitutional right to legal representation. The same right does not extend to representation by non-lawyers like CPAs or H&R Block.
Posted by: bohuma at August 13, 2009 1:36 PM
If you're looking for an accountant familiar with these situations, we use Minyard & Co (www.minyardcpa.com). They're based in Phoenix but have some clients in NYC and are up here several times a year.
Posted by: gila at August 13, 2009 3:35 PM
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