Rental Q An A
I recently acquired a rental property via upgrading my home. I now have my old residence for rent. And of course, a couple questions.
1) I'm somewhat unclear, what is the best way to hold property, in a LLC or a corp?
2) If I dont form an entity to hold the propertly, will I be able to write off repairs, interest, etc on the rental home on my personal taxes?
3) What documentation is required to report items for the rental property. Is it as simple as supplying a receipt. Is it ok if the item is paid for out of a personal checking account?
thanks
Illum!
Renting your old property may not be the best course of action. If you've lived and owned it for at least 2 yrs, any "profit" (money gained over the loan amount) is tax free. By making the property into a rental, you have started a business and made the property income property which MAY cancel this tax benefit.
in reply to your questions.
1) For one property, no entity is probably worth the time and expense. However, speak with you tax professional and/or attorney to get expert and legal advice.
2) By becoming a landlord you have started a sole propreitorship, the most basic form of business. Yes, as long as you keep acurate records of your business expenses, you can count them as write-offs for your taxes. Again, a good real estate CPA will be able to help you best.
3) Again, a tax professional is best used to properly set up your accounting. Keep all your receipts concerning business. It is much better to setup a separate checking account for you business. While this can still be a personal account (no business setup fees, etc) it should be an account different from the one you use to pay your personal bills.
Hope it helps,
Roger
I have a question here regarding the 3rd point. Can I open up a bank account in my name but use it for business or should I open it in the name of the business?
That depends. If your a sole proprietorship, then your name is the business name. So opening up a separate checking account under your name and using it for business purposes is okay.
However, this won't work if you have formed a business entity like a LLC, or corp. Entities are completely separate and would require their own checking accounts, etc.
Roger
Quote:Renting your old property may not be the best course of action. If you've lived and owned it for at least 2 yrs, any "profit" (money gained over the loan amount) is tax free. By making the property into a rental, you have started a business and made the property income property which MAY cancel this tax benefit.If you have a significant amount of appreciation in your former primary residence, then you may want to preserve tax free profits.
Let's say you have owned and occupied your primary residence for at least two years. You are allowed to convert your primary residence into a rental for up to three years prior to the sale and still preserve your tax free capital gains. Use the property as a rental for three years and one day, your property becomes an investment rental property and is no longer your primary residence. If you now sell it, your profit becomes a taxable capital gain. As long as you can meet the "two of the last five years" ownership and occupancy tests, you can take your profits tax free regardless of how you used the property in the other three years. Depreciation recapture will still apply however.
Quote:2) By becoming a landlord you have started a sole propreitorship, the most basic form of business.While this is true figuratively, you are not a sole proprietor for tax purposes in the sense that a sole priprietor is engaged in an active income activity. A sole proprietor reports income and expenses on Schedule C and pays self-employment income taxes on Schedule SE.
As a landlord, it would be better to characterize you as an investor. Your rental activity is a passive income activity and is not subject to self-employment income taxes. You report your income and expenses on Schedule E and take a depreciation expense as well. Attach Schedule E to your personal 1040 when you file your annual tax return.
In the absence of a formal business entity, you can open a separate personal checking account just for your rental property activities.[ Edited by DaveT on Date 10/24/2003 ]