I'm preparing my taxes for 2010 using H&R tax cut software premium and
I have some questions about rental income. In July 2010, I moved from
PA -> CA for a new job. I have a home in PA (I have a mortgage on this
home that I pay every month + condo association fees + real-estate
taxes). Using a real estate agent, I found some tenants and I rented
the home out for a year. They mail me the monthly rent and I take care
of any maintenance requests. I will mostly likely sell the house in
Regarding reporting of rental income, I'm not sure whether to report
in Schedule C (business) or somewhere else? Should this be treated as
a business activity? I did pay for some home repairs, and fly back in
Dec of 2010 to inspect the property for proper usage, etc.
You report this on schedule E. The form is pretty straightforward. You
deduct all your expenses on it, and claim the income. Purchases that are
improvements or additions such as appliances, carpet, etc, are added to
basis and depreciated. Items such as painting, or normal maintenance are
pallav wrote in news:51dc04bb-1f79-44e0-9a44-
Just anothr landlord, but for this type of activity, you would use
Sked E. The main difference from C I would say is that you don't have
to pay the self-employment tax on profits, but OTOH it isn't "earned
income" so you can't make a contribution to an IRA based on it either.
By law, rental residential real estate like this is treated as a
"passive activty", which affects the timing in which you can deduct
any net loss. Based on your comments it appears that you "actively
manage" the property and are not a "real estate professional", so
depending on your income and filing status, you may be able to
deduct any loss against other income, up to a limit. Any amount
that can't be deducted in the year the loss is incured is carried
forward for possible use in the future, and if you dispose of the
property any remaining carryover loss is deducted at that year.
Since you have a rental agreement for one year, I believe the law
allows you to treat the change from personal residence to rental as
a conversion, and you don't have to use the "vacation home" rules
for allocating expenses. Instead you count any expenses that
are incurred for period of personal residence under sked a (to the
extent they would normally be deductable, mainly interest and
taxes), and any expenses incurred after the property is "placed
in service" (i.e., ready and available for rental) under sked e.
Any expenses paid in advance or arrears would be pro-rated based
on the period covered.
Aside from the expenses, you also have to establish a "cost or other
basis" for the property, which in general is going to be the lessor
of purchase price or current market value. You then have to establish
a depreciation schedule depending on the "class life" of the property.
I don't know about condos, I imagine you will have to make an
allocation between the "common elements" and the unit you own. Note
that any personal property in the unit (such as appliances that are
not built-in) can probably be treated as separate assets for
purposes of determining class life and depreciation. If your loan
is "upside down" (current market value is less than purchase price/
loand balance) there might be some issues on how much interest is
deductable as rental expense (haven't had that circumstance so
never looked into it). Normally interest on a loan used for
acquisition of the rental asset is deductable. Some things like
a cash-out refi or home equity LOC while it was your primary
residence might need to be considered.
Note that income from real property will typically be considered
as sourced in the state in which it is located, so I suspect PA
will want state income tax from you, at least as a non-resident or
part year resident. There may well be some other state taxes or
fees (municipal as well) that you will be respnsible for. Don't
forget adequate liability insurance, and your insurance carrier
might require you to switch from a homeowners to a straight fire
policy with separate liability policy. Also when
you sell, it is common for states to have mandatory witholding
for assumed captial gains when the seller is out of state, so you
need to consider that.
I supose in many instances when setting up for the first year help
from a professional might be warranted, unless you are a true
You will most likely use Schedule E for this.
A Schedule C rental is possible, but these are almost always "hotel" type
rentals. You'd have to include a furnished place and substantial other
amenities - like utilities - in order to put it on Schedule C.
Gene E. Utterback, EA, RFC, ABA
You may be a CA resident if you intend to live them permanently. So
you have to pay PA tax and CA tax, and on your CA tax you get a credit
for taxes paid to PA.
Others answered about Schedule E. Also, about flying back. If you
flew back and did personal stuff, like visit family, then you have to
prop-rate the airline ticket. Say you paid $400, and 1 day was spent
inspecting the house and 3 days hanging out with family or touristing,
then only $100 of the airfare is deductible.
In addition, when you were living in your house as a personal
residence, the condo fees were not deductible. Now they are as a
business expense on Schedule E.
In addition, there are issues with the cost basis. The cost basis,
for the purpose of depreciation (though you only depreciate the
building not the land), is the lower of your cost basis and the FMV at
the time you started the rental. Say you bought your house for 500k
and added 15k of stuff (like new deck), cost is 515k. If FMV of house
is 800k at time of rental then cost basis for depreciation is 515k.
If FMV is 400k, then cost basis for depreciation is 400k. In the
second scenario, if you sell the house a year later for 480k, you have
capital gain of 80k + one years depreciation. I think you can use
section 121 to exclude the capital gain, provided you qualify to use
He may well have a net loss on the rental, but still have a PA filing
requirement based on gross rental income (I haven't checked).
Fortunately, he can deduct the same rental expenses on both his CA and
Not necessarily. It depends on the primary purpose of the trip NOT how many
days he spent doing other activities. For example, in 2008 I went to
Florida to attend the IRS National Tax Conference. This conference runs
three days - Tuesday, Wednesday & Thursday. It starts at 8AM and ends 5PM.
As it would be most inconvenient for me to fly in and attend an 8AM session
on the same day, as well as check out of a hotel (11AM?) but not leave the
conference until 5PM - keeping in mind how much lead time you need to arrive
at the airport for security screenings, I chose to go in one day early and
leave one day later.
I'm sure you wouldn't think that I would have to prorate my airfare or
accommodations and only take 60% since the conference was only for 3 of the
5 days, would you?
Now let's expand on this a bit - when I called the hotel they offered me a
deal. If I stayed over TWO weekends they would reduce the daily rate to a
point where it was cheaper for me to arrive on Saturday and leave 8 days
later on Sunday than it was to just stay Monday through Friday.
Additionally, the airline gave me a similar deal - by leaving on Saturday
and staying over two weekends I got a better rate on the airfare than if I
flew in on Monday and back on Friday.
So staying over some extra days before AND after the conference actually
cost me less than if I had just gone for the conference. Of course, I did
other things - I went to Disney, visited friends, lunged at the pool, etc.
BUT there was no need to pro rate any of the costs. I did not deduct any
meals for the conference related days, but I was entitled to deduct the full
cost of the airfare and lodging.
What you have to do is look at the primary purpose of the trip. For this
instance the ONLY reason I went to Florida was for the IRS conference. If
it had not been for that I would not have gone to Florida. That I spent
some extra time doing personal things is irrelevant for the airfare and
lodging as long as doing those extra things did NOT add to the cost of the
airfare of lodging.
Gene E. Utterback, EA, RFC, ABA
...But you have a business reason for staying the extra two days.
[I too usually arrive the day before and leave the day after.]
Now, if the reason you stayed an additional day was to visit a distant
relative living in the area, that would be different (i.e. personal).
[Implied from section 274]: If the personal component of the trip is more
than 25% (of the time or cost), one risks that the primary purpose of the
trip was personal, thus disallowing the majority of the expense except for
the ADDITIONAL cost attributed solely to the business purpose.
[Granted, TR 1.274-4(b)(3) and 1.274-4(d)(1) talk about the 25% of time
for travel outside the U.S., but it may also serve as a guideline for
travel within the U.S., especially since the Code grants the Secretary
specific authority to issue regulations for this section. TR 1.274-5T,
which governs domestic travel, itself doesn't actually state a percentage
or ratio for mixed-purpose trips.]
Again, there's a business reason - lower cost.
Now, did you just have to say that! Did Mickey Mouse sign your tax return
I agree: The primary purpose of the trip is what governs.