Category Archives: Hudson Valley NY

HOW THE TAX LAWS AFFECT HOME RENTALS!

It’s common practice for people to rent out their vacation homes when they are not being used for personal Rest and Relaxation. That rental income can cut the costs of owning and maintaining a second home. But these days, some of you may be cashing in on short-term rentals of your primary homes. Those of you who live in or near vacation destinations or who live in the vicinity of major events can now connect with renters through advertising sites like Craigslist or rental sites like Airbnb. So for example, back in 2015 many Philadelphia residents jumped into the short-term rental market when Pope Francis visited that city.

House with the words For Rent

A Short-Term Rental Can Affect Your Taxes!

Unlike typical vacation home landlords, some taxpayers may be unfamiliar with the tax law rules on rentals of a residence.

Rule #1:

Short Term Rentals. Under a longstanding tax rule, many short-term home rentals are essentially tax-free. The IRS says that when a home is rented for less than 15 days during a year, there’s no need to report the rental income or expenses. The rental income and rental expenses are simply ignored for tax purposes. Home-related expenses, such as mortgage interest and property taxes, are deducted as usual if the homeowner itemizes deductions.

Once rentals hit the 15-day mark, two other rules come into play depending on whether the property qualifies as a personal residence or as investment property.

Rule #2:

Personal Residence Rentals. If a personal residence is rented for 15 days or more during the year, all the rental income is included in income. Expenses are allocated between personal and rental use based on the number of days the home is used for each purpose. Otherwise deductible expenses attributable to personal use (mortgage interest, property taxes) can be written off if the homeowner itemizes deductions. All expenses attributable to rental use are deductible—but only up to the amount of gross rental income.

A home is treated as a personal residence for a tax year if it is used for personal purposes for more than the greater of (1) 14 days or (2) 10 percent of the total days it is rented at a fair rental price.

Days of personal use generally include any days the home is used by you or a family member or by anyone at less than a fair rental price. However, days the homeowner spends on repairs and maintenance are not personal use days, even if family members use the property for recreational purposes on the same day.

KEY POINT: This rule is not likely to come into play when a homeowner rents out their primary residence on a short-term basis. But it can crop up with vacation home rentals. For example, if a person uses a vacation home for a three-week vacation each year (21 days), the home will be treated as a personal residence only if rental use is limited to a total of 30 weeks (210 days).

Rule #3:

Investment Property Rentals. If a person’s property does not qualify as a personal residence, it’s considered an investment property. In that case, it is subject to the passive loss rules. Rental deductions are not limited to the amount of rental income, but any overall loss on the rental is deductible only to the extent of income from other passive investment sources. There is, however, an important exception: If a person has adjusted gross income of $100,000 or less and is actively involved in rental of the property (for example, by making repairs, approving tenants, and the like), the homeowner can write off up to $25,000 of the net rental loss against non-passive income, including his or her salary. The $25,000 exception is phased out a rate of 50 cents for each dollar of income between $100,000 and $150,000.

TAX TIP: By fine-tuning personal use of the home, homeowners can pick the rule that will yield biggest tax deductions.

Example: Bob and Carol Smith have adjusted gross income of about $95,000. The Smiths own a beach home that they use for three weeks each summer and rent for the remaining 12 weeks of the season. Their annual rental income is $18,000. Their total annual expenses for the home, including mortgage interest, taxes, maintenance and depreciation, come to $40,000. Of that amount, $8,000–including $4,000 of mortgage interest and $800 of property taxes—is allocable to personal use. The remaining $32,000 is allocable to the rental. The Smiths’ three weeks of personal use puts the vacation home in the personal residence category. Therefore, the Smiths can deduct the $4,800 of mortgage interest and taxes attributable to their personal use (the remaining expenses attributable to personal use are nondeductible). In addition, they can deduct their rental expenses—but only up to the amount of their rental income. Total deductions: $22,800. 

Change of Plans: The Smiths limit their annual vacation to just two weeks and rent the home for an additional week, increasing their rental income to $25,500. Based on their new mix of rental and personal use, they allocate $5,320 of expenses, including $2,660 of mortgage interest and $532 of property taxes, to their personal use. The remaining $34,680 of expenses are allocable to the rental.

Cutting back on vacationing makes the home an investment property. The Smiths lose some deductions on the personal side; they can deduct the $532 of property taxes attributable to personal use, but not the $2,660 of mortgage interest. (Mortgage interest attributable to personal use is deductible only if the home qualifies as a personal residence.) However, they pick up substantial deductions on the rental side. They can deduct their rental expenses up to the amount of their $25,500 of rental income. In addition, because the Smiths’ adjusted gross income is below $100,000, they can deduct their $9,180 loss on the rental ($34,680–$25,500) against other income. Total deductions: $35,212.

On The Flip Side: Assume the Smiths’ adjusted gross income exceeds $150,000. In that case, they may want to do more vacationing, rather than less. Reason: Whether the home is classified as a residence or an investment property, their rental deductions will be limited to their rental income. But by boosting their personal use, they can increase the amount of deductible mortgage interest and taxes attributable to personal use.

So, I hope that you found this article to be helpful. Feel free to drop me a reply.

If you have a short-term (or even a long-term) rental you may be hurting yourself when it comes to taxes and the IRS.

So, give Solid Tax Solutions a call at (845) 344-1040 and let us get and keep you on the correct and profitable path.

And, don’t forget to check out our other informative articles on our blog: TheTaxNook.com.

Until the next time….
__________________________________________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

ARE YOU SELLING YOUR HOME?

Ahhh……Summer Is Here!

 

Summer is typically a “hot season” in the home sale market. Young families typically want to get settled in a new home before school begins in the fall, and older home sellers in northern climates want to head south before winter sets in. People who are buying a new home will need to do some serious number crunching to determine what they can afford to pay and how they will pay it. However, those of you who are home sellers will need to do some number crunching as well.

Under current tax rules, a loss on a home sale is not deductible. On the other hand, the first $250,000 of gain on a home sale is excluded from income. What’s more, for joint filers, the exclusion is generally doubled to $500,000. However, for long-time homeowners, even those generous exclusions may not shelter all of that gain from tax. Therefore, you will need to:

Get Back to Basis

To properly determine gain (or loss) on the sale or exchange of a home, a taxpayer must know the basis of the home for tax purposes. And calculating basis will involve information that dates back to the time the home was purchased. Or perhaps even earlier.

The amount of gain or loss on a sale is determined by comparing the amount realized on the sale to the adjusted basis of the home. If the amount realized is greater than the adjusted basis, the difference is a gain. If the amount realized is less than the adjusted basis, the difference is a loss.

Cost Basis

In most cases, the starting point for determining basis is the cost of the home. So, if a home was purchased from the builder or from a former owner, the initial cost basis includes the purchase price and certain settlement costs. The purchase price generally includes the down payment and any debt, such as mortgage or notes given to the seller in payment for the home.

Settlement fees or closing costs associated with the purchase of the home can be added to basis. However, fees associated with a mortgage on the home (e.g., appraisal fees, costs of a credit report or mortgage insurance fees) are not added to basis. In addition, escrow amounts for payment of future liabilities are not included in the basis of the home. Some examples of settlement fees that can be added to basis include:

  • Abstract of title fees
  • Charges for installing utility services
  • Legal fees (e.g., fees for a title search and for preparing the sales contract and deed)
  • Recording fees
  • Survey costs
  • Title insurance
  • Transfer taxes

When a home changes hands, real estate taxes for the year of the sale are apportioned between the buyer and seller based on the number of days each of them held the property during the year. The date of the sale counts as a day the property is owned by the buyer. Real estate taxes for the year of sale may increase or decrease basis, depending on how the taxes were handled at the closing. If the buyer paid taxes owed by the seller and was not reimbursed, the taxes increase the buyer’s basis of the home. If the seller paid taxes owed by the buyer and was not reimbursed, the taxes decrease the buyer’s basis of the home.

In the case of a home that was constructed by or for the taxpayer, basis includes the cost of the land plus the construction costs. However, if the taxpayer did all or part of the construction personally, basis does not include the value of the taxpayer’s own labor or the value of any other unpaid labor. 

Basis Other Than Cost

Special rules apply in determining basis if a home was acquired other than by purchase or construction—for example, as a gift or inheritance or as part of a divorce settlement. In addition, a taxpayer may have a basis other than cost if a home was acquired as a replacement home in a home-sale rollover under prior law. 

Adjustments to Basis

A taxpayer’s basis in a home is not static. Basis may be adjusted upward or downward to reflect expenditures made in connection with the home or payments or other benefits received.

Improvements that increase basis include:

  • Additions to the home, such an extra bedroom or bath, a family room, a deck or patio, or a garage.
  • Landscaping and other outdoor improvements, such as a new driveway or walkway, fences and walls, a sprinkler system, or a swimming pool.
  • Systems improvements, such as a new heating system, central air conditioning, a new furnace or ductwork, wiring upgrades, a septic system, a water heater or water filtration system, a satellite dish, or a security system.
  • Exterior improvements, such as new storm windows or doors, roof, siding or shutters.
  • Interior improvements, such as built-in appliances, kitchen cabinetry, flooring, wall-to-wall carpeting and insulation.

CAUTION: Improvements that are no longer part of a home are not included in the home’s basis.

Example: John Smith bought his home for $200,000 in 2005. In 2006, John added a deck to the home at a cost of $6,000. In 2012, John remodeled the home, which involved removal of the deck and the addition of a new covered porch. The addition and porch cost $30,000. Result: After the addition of the deck in 2006, John’s basis in the home increased to $206,000. However, after the deck was removed in 2012, it was no longer included in the home’s basis. Therefore, John’s basis for the home following the remodeling is $230,000 ($206,000 – $6,000 + $30,000).

Some examples of repairs that do not increase basis (unless they are part of an overall renovation or remodeling) include interior or exterior painting, fixing gutters, repairing leaks or plastering, and replacing broken windowpanes.

AND HERE ARE 11 ADDITIONAL ‘HOME SELLING’ TAX TIPS:

  1. Generally, you can exclude a gain from the sale of only one main home per two-year period.
  2. If you can exclude all of the gain, you probably don’t need to report the sale of your home on your tax return.
  3. You can choose not to exclude the gain from a sale. If you expect to sell another main home within two years, you may want to consider claiming the gain on sale of your current main home instead of excluding the gain. You can only claim an exclusion on the sale of your main home once every two years (See Tax Tip #1). Depending on your specific sale, it may be more beneficial to claim the current gain as income and use the exclusion on the future sale of your main home.
  4. If you can’t exclude all of the gain, or you choose not to exclude it, you’ll need to report the sale of your home on your tax return. You’ll also have to report the sale if you received a Form 1099-S – Proceeds From Real Estate Transactions.
  5. If you have more than one home, you can exclude a gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is usually the one you live in most of the time.
  6. If you received the First-Time Homebuyer Credit when you purchased your home, you may have to pay some or all of it back.
  7. If you didn’t live in the home the entire time you owned it, you may have to pay tax on part of the gain. If your house went up in value when you were not living in it; for example, when you used the property as a rental house, you cannot exclude gain from the time you rented it out. For determining the amount of the gain you cannot exclude, the property is assumed to have gone up in value evenly over the period of time you owed it.
  8. You don’t have to buy a home of greater value, or any other home, to exclude this gain.
    There are no longer any requirements to buy another home after you sell in order to exclude the gain from the sale of your home.
  9. Long-term capital gains rates are lower than the ordinary tax rates you pay on short-term gains. Long-term capital gains tax rates for 2017 are 0%, 15%, or 20%, depending on your income tax bracket. Ordinary income tax rates for 2017 range from 10% to 39.6%. High-income taxpayers must pay an additional 3.8% tax on Net Investment Income (NIIT), including any gain from the sale of a residence that is not excluded from income. For this purpose, a high-income taxpayer is a taxpayer with a Modified Adjusted Gross Income (MAGI) of more than $200,000 ($250,000 if married filing jointly or a qualifying widow(er), $125,000 if married filing separately).
  10. When you sell your home and move, be sure to update your address with the IRS and the U.S. Postal Service. File Form 8822 – Change of Address, to notify the IRS.
  11. Most Importantly——>If you are selling your home (or are just thinking about it) contact Solid Tax Solutions and let us help you: (845) 344-1040.

Hey, if you like this article let us know and also take the time to look at some of the other helpful articles here at The Tax Nook and please feel free to share our blog with your family and friends.

Until the next time….

_________________________________________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).