Thread: Investment properties and tax write offs

Originally Posted by pyriel

Now, for the IRA issue, you can create a corporation (c or s is up to you). You can then become an employee of that corporation and your salary can be funneled through an IRA. I plan on doing this with all of my rental later so that I can continue to contribute even when I retire from my job (it is also a good way to make profit dissapear). The other way is to put your rental property under an IRA. Very complicated and I have never tried it so I will defer that for someone to explain.

I hope I didn't make this clear as mud...;-) Pyriel

pyriel,

I would like to hear more about your thinking of creating a corporation. Are you planning to convert your existing rentals into the corporation owned? How complicate is that? Specically with the mortgage company, would they allow to do it.

I became a landlord last year. When I was trying to do the tax returns this year, I realized that I can't deduct the loss on rental income and depreciation because of my household income. I am thinking about taking my rentals into a form of S Corporation. I will have to do more research this area. But your thought will be appreciated.

Thanks

Ocean

Originally Posted by ocean

pyriel,
I became a landlord last year. When I was trying to do the tax returns this year, I realized that I can't deduct the loss on rental income and depreciation because of my household income. I am thinking about taking my rentals into a form of S Corporation. I will have to do more research this area. But your thought will be appreciated.
Ocean

I created an S corporation for my apartment and use 1120s tax form (to include Schedule K-1) which becomes an addendum to my 1040 long. Gains or losses is inputted in 1040 at a section INCOME blocked 17. If it is a loss, this should lower down your income that you get from your W2 (those who do their taxes would know what I am talking about). Instead of an S or C corporation, I would advocate creating and LLC. It is almost the same as S corporation. The difference is capital gain tax. When you decide to sell the property later. Corporation gets hit with the highest capital gain tax vs. individual capital gain tax with LLC. For tax purposes, that is the only difference I can find between the two. For deduction purposes is concern, LLC is treated like a corporation. I didn't learn about LLC until later.

I am concern about you not being able to deduct the loss on your rental property and depreciation. By using Schedule C you should be able to use your rental loss and depreciation (and repairs, and property tax, and tax preparation expense, etc. etc. etc). You then take the loss (or gains) at a section INCOME blocked 12. Again this should lower down your income coming from your W2 before you hit the Adjusted Gross Income section.

Hmmm... Am i posting in the right place or this should go to Section under Taxes.
P

Originally Posted by pyriel

I am concern about you not being able to deduct the loss on your rental property and depreciation. By using Schedule C you should be able to use your rental loss and depreciation (and repairs, and property tax, and tax preparation expense, etc. etc. etc). You then take the loss (or gains) at a section INCOME blocked 12. Again this should lower down your income coming from your W2 before you hit the Adjusted Gross Income section.

Hmmm... Am i posting in the right place or this should go to Section under Taxes.
P

pyriel,

Thanks for taking the time to explain it. When I was preparing this year tax returns a week ago, the Form that I think I could use for rental income was schedule E for rental profit or loss. And Form 8582 was used for property depreciation. According to the tax publicaton, all rental properties are considered as passive activity. That's why I used these Forms and followed their guidelines on limitation for deduction and that's where I found that I could not deduct any loss because of the Adjusted Gross Income limitation.

You mentioned that Schedule C can be used for loss and depreciaion. I noticed that the title of the Form is "Profit or Loss from Business - sole proprietorship". Am I allowed to use this Form instead of Schedule E even though I did not register as either Corporation or LLC? Your thought would be appreciated.

Ocean

Originally Posted by ocean

pyriel,

Thanks for taking the time to explain it. When I was preparing this year tax returns a week ago, the Form that I think I could use for rental income was schedule E for rental profit or loss. And Form 8582 was used for property depreciation. According to the tax publicaton, all rental properties are considered as passive activity. That's why I used these Forms and followed their guidelines on limitation for deduction and that's where I found that I could not deduct any loss because of the Adjusted Gross Income limitation.

You mentioned that Schedule C can be used for loss and depreciaion. I noticed that the title of the Form is "Profit or Loss from Business - sole proprietorship". Am I allowed to use this Form instead of Schedule E even though I did not register as either Corporation or LLC? Your thought would be appreciated.

Ocean

Schedule E vs. Schedule C, that is the question... It is really a gray area on which one you would want to use. For Schedule E, IRS says, "To report real estate and royalty income (or loss) that is not subject to self-employment taxes. Schedule C "to report income or loss from a business you operated or a profession you practiced as a sole proprietor." Schedule E, Part I also state, "If you are in the business of renting personal property,use Schedule C or C-EZ." Which one should we follow?

My answer is use the form that will allow you the most deductions. Why? Because it is a gray area for those who are into real estate rental taking in passive income. Rental properties (not under LLC, S or C Corp) are considered sole proprietorship under the owner. Why is it called sole proprietorship? It is because there is one owner (you). I assume that you have a business license and I also assume that LLC, S or C Corp is not written on it. When you receive a business license to run your rental unit it becomes a business which now allows you to use Schedule C.

However, since rental income is a "rental real estate," then you should be able to use Schedule E as well. Why? Because this is really a proper form rental real estate. In fact, in Part I of Schedule E, you must list your rental property one at a time and produce the income of loss from them.

Here is the bottom line, many tax preparers will not know the difference between the two. IRS also wouldn't care as much as long as you are reporting your income or losses correctly. Both forms should give you the same amount of income or losses (and depreciation, and expenses) so I wouldn't worry about it... If you are not trying to cheat the government by evading taxes, the worst they can tell you is to redo your tax and switch one form to another form. 10 out of 10, that doesn't happen...
Pyriel

Originally Posted by pyriel

Schedule E vs. Schedule C, that is the question... Schedule E, Part I also state, "If you are in the business of renting personal property,use Schedule C or C-EZ." Which one should we follow?

My answer is use the form that will allow you the most deductions. Pyriel

Pyriel,

You are the man! Your answer here probably will give me about $10K deduction on Federal tax. That transforms into about $3K saving of the federal tax that I will pay and it is legal. State tax would not make the difference because there is no deduction for business loss in NJ.

I took a quick glance on Schedule C, I found these Forms contain many similar reporting area. Only difference is that it did not indicate that there is a separate area for filing more than one property. I have 3 rental properties where 2 that I acquired last year and 1 that I converted to rental from my vacation home. I think I may need to add all the incomes and expenses from these properties in order to use Schedule C. If it is workable, then I will use Schedule C and I will investigate some more on these Forms.

This year I will file an extension on my returns so I will have another 4 months to prepare it.

Pyriel, I really appreciate the information that you'd given here. Aside from your TSP investment, I know you are on your path to your financial freedom in the real estate investment.

Ocean

Pyriel,

After my little research, I found that for non registered business, the profit or loss will need to use Schedule E which I belong to this category. It means that the deduction of the loss for current year is based on the threshold of AGI and it can be carried over for future years. For now, I think I will use Schedule E on the safe side and write-off my loss when my household incomes reduce when both my wife and myself retire in about 8 years.

Thanks,
Ocean

Originally Posted by ocean

Pyriel,

After my little research, I found that for non registered business, the profit or loss will need to use Schedule E which I belong to this category. It means that the deduction of the loss for current year is based on the threshold of AGI and it can be carried over for future years. For now, I think I will use Schedule E on the safe side and write-off my loss when my household incomes reduce when both my wife and myself retire in about 8 years.

Thanks,
Ocean

What is a non registered business? No business license? Are they paying on a cash basis? Hmmmm... I think that you are on the right track.... PM me for your answer and lets see what you can I can come up with. Something comes to mind right away but would not want to post it here...;-)