prorating rental expenses?


Q

qguy

I am not very familiar with how we report rental income on Form 1040 (Sched
E?). I know the devil is in the details. But I am looking for some "rough"
approximations.

In general, I presume we can only deduct expenses to the extent that they
offset income. That is, no negative "income". Right?

Suppose we rent for 2 months with $2800 income (Jan and Feb), but we incur
expenses for the year of $2800.

Some expenses are repairs, termite inspection, landlord insurance and
property tax while we waited for another tenant, which we never found. Some
expenses were for utilities; arguably we should have turned them off in the
interim, but we didn't. All "costs of doing business", including "bad
business decisions"? ;->

Can we deduct the entire expenses from income ($0 net)?

Or must we prorate the expenses to cover only the period when we had income
(2 months); i.e. $2800*2/12 = $467 (net $2800 - 467 = $2333)?

Or can we only deduct expenses while the rental was occupied? For example,
if the termite inspection and repairs were done after Feb, they are not
deductible at all?
 
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M

Mark Bole

In general, I presume we can only deduct expenses to the extent that
they offset income. That is, no negative "income". Right?

No, not right. Rentals can generate net losses, which may or may not be
currently deductible under passive activity loss rules. Some rentals do
have the limitation you describe, however.


Suppose we rent for 2 months with $2800 income (Jan and Feb), but we
incur expenses for the year of $2800.

Some expenses are repairs, termite inspection, landlord insurance and
property tax while we waited for another tenant, which we never found.
Some expenses were for utilities; arguably we should have turned them
off in the interim, but we didn't. All "costs of doing business",
including "bad business decisions"? ;->


Expenses have to be "ordinary and necessary". As for "waiting for
another tenant", what steps did you take to find a tenant, especially
after the first few months of vacancy? This is a "facts and
circumstances" situation where there is no simple formula you can
follow. I for one am not interested in the specific details, but rather
am asking the question so that you can decide if you can document
reasonable efforts to find a tenant, and could present them in an audit
with a straight face.

Real property taxes are always deductible on your Schedule A, if nowhere
else.

You have not mentioned depreciation expense, which should be deducted to
the extent allowable (since you will have to account for it down the
road, whether actually deducted or not).

Can we deduct the entire expenses from income ($0 net)?

Or must we prorate the expenses to cover only the period when we had
income (2 months); i.e. $2800*2/12 = $467 (net $2800 - 467 = $2333)?

Or can we only deduct expenses while the rental was occupied? For
example, if the termite inspection and repairs were done after Feb, they
are not deductible at all?


Too much missing information to answer these questions (although I can't
think of scenario where you would pro-rate the annual expenses). If
this is the first year of rental activity, it is highly recommended to
consult with a tax professional. Not only do you want to get the annual
rental activity correct, but there are important items regarding how you
acquired the property, what its use before and after the rental activity
are, and how you intend to ultimately dispose of the property, that you
really should get straight sooner rather than later.
 
Q

qguy

Mark Bole said:
I for one am not interested in the specific details,
but rather am asking the question so that you can
decide if you can document reasonable efforts to find
a tenant
Thanks for that.


Mark Bole said:
Too much missing information to answer these questions
I thought as much.

I'm at arm's-length on this, lacking first-hand information. Just trying to
help my wife's family, who oversee the rental of my mother-in-law's former
residence. (She is now in a "senior community".) Too difficult for me to
get details. We certainly will rely on our professional tax preparer (CPA)
to do the right thing when filing returns. Just trying to get a leg-up on
estimated taxes while he is on vacation. Advantageous to mail the Calif
estimate by Dec 31.

But the gross rental income is small enough that it can be ignored for that
purpose.


Mark Bole said:
Real property taxes are always deductible on your
Schedule A, if nowhere else.
Klunk! Sometimes I get so focused on one problem, I put blinders on and
overlook the bigger picture. Thanks again.
 
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D

D. Stussy

"qguy" wrote in message ....
But the gross rental income is small enough that it can be ignored for that
purpose.

========
No, it's not. Rental income on a residence (or recently converted) can be
ignored only if it is for 14 days or less for the entire year (see the
"business use of home" topic for details).
 

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