 Income tax 2022-2023, reporting rental income, expenses and losses, casualties and thefts. Let's do some wealth preservation with some tax preparation. Most of this information comes from publication 527, residential rental property, including rental of vacation homes tax year 2022. You can find on the IRS website, irs.gov, irs.gov. Look support accounting instruction by clicking the link below, giving you a free month membership to all of the content on our website broken out by category further broken out by course. Each course then organized in a logical, reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files and more, like QuickBooks backup files when applicable. So once again, click the link below for a free month membership to our website and all the content on it. Looking at the income tax formula, we're focused online. One income remember on the first half of the income tax formula is in essence and income statement, but just an outline other forms and schedules flowing into these line items like the schedule E it in essence being an income statement in and of itself with rental income minus rental expenses, the net rental income in essence rolling into line one income of the income tax formula, casualties and thefts. Now remember that in prior presentations, we discussed the concept that rental income, although it's similar in nature to other types of business income in that we in essence will have an income statement rental income minus rental expenses is not reported on the schedule C the form often used for other sole proprietor type businesses, but rather reported on a schedule E in part because it might be subject to other kind of rules such as passive activity rules, a limiting losses and because you might not be subject to the self-employment tax as you are with other sole proprietor type of businesses reported on the schedule C. Now the idea with the losses is what we're really kind of focused in on when we're going to the schedule E with the rental property remembering that the IRS is okay if you have income that's fine they just want a piece of it, but it's quite likely oftentimes that people run losses with the rental property remember that if it was a business a schedule C business it would be natural to have losses in the first couple years and it would seem reasonable to be able to take those losses against other income because those are basically the investments later years when you start generating income it was those losses that you invested in order to help you to generate the income so you would think you would get a tax benefit from it when we move over to the rental side of things however we have this added component of it being passive in nature you're not as actively participating and you've got the rental property itself which might be going up in value and having a capital gain that you're not going to realize until the point that you sell the property so you can imagine situations where people are quite content to run losses with the rental property as long as they can take them against other income and hope that the rental property itself accumulates upward in terms of capital gain so that they could sell it at some future point enabling them to take losses against other income and then kind of sell the rental property so you have a bit of a different scenario and you can see why then that's kind of the rationale of why you might limit the losses with passive activity losses we discussed the back and forth with the losses I would imagine like the IRS arguing with different people that own real estate right they're going to say hey the IRS is saying you take advantage of losses I'm gonna I'm gonna make it all passive and not allow you to have any losses and then some people say hey I'm a real estate professional I'm not a billionaire or anything I'm I should be able to take losses like any other type of business because this is my business and so you can see them carve out possibly an exception for that and then you can imagine someone else saying well I'm not a real estate professional but I do a lot of work in my real estate property I'm not just a billionaire sitting around just collecting rent I do do actively participate so they carve out you know 25,000 if your AGI is under a certain threshold of losses that you might be able to take and so on and then you've got casualty and theft losses which you would think would be a different kind of scenario given the fact that these aren't just normal losses that you're taking they're resulting from casualty and theft okay so that's where we're at now so as a result of casualty or theft you may have a loss related to your rental property you may be able to deduct the loss on your income tax return casualty this is the damaged destruction or loss of property resulting from an identifiable event that is sudden unexpected or unusual so here's the key terms it's it's a casualty it was it was sudden so something of course happened out of the blue unexpected so obviously if you could expect it then you would plan for it hopefully and or unusual not something that would typically be happening otherwise you would be taking it into consideration and it wouldn't be like a casualty so such events include storms fire or earthquake so theft so this is defined as the unlawful taking and removing of your money or property with the intent to deprive you of it so obviously theft is pretty straightforward but with all the looting and stuff that goes on these days I think people actually forgot what theft actually is so maybe you have to read theft is defined as the unlawful taking and removing of your money or property with the intent to deprive you of it you know so there it is in case we've forgotten as a society what theft gain from casualty or theft so it is also possible to have a gain from a casualty or theft if you receive money including insurance that is more than your adjusted basis in the property so here's what it gets messy because if you had your property your rental property something happens it gets destroyed or whatever and you have damages which would lock would be losses but then the insurance kicks in and they give you money well that that means you no longer really have the losses because you recoup the losses but it's possible that they actually give you more money than the basis in the property because possibly they gave you insurance for example in the fair market value of the property and maybe the property went up over time so that you actually got more money than the basis of the property the cost of the property so if you sold the property it would be the sales price minus you know the cost so generally you must report this gain however under certain circumstances you may defer paying tax by choosing to postpone reporting the gain to do this you must generally buy replacement property within two years after the close of the first tax year in which any part of your gain is realized so you can imagine the situation right so like I had it I had a house that I was renting I paid a hundred thousand dollars for it or whatever my basis is a hundred thousand dollars but the actual house my depreciated basis is a hundred the actual house went up to two hundred thousand dollars and now the house you know went burned down or whatever and then I got paid by the insurance company they paid me something closer to two hundred thousand anything over one hundred thousand even though the two hundred was my fair market value is more than my adjusted basis in the property if I was to sell it for two hundred thousand the fair market value I would have had a hundred thousand dollar gain so now I was involuntary this wasn't a voluntary choice to sell the property it was destroyed and then I'm given the insurance and it kind of acts like a sale and that I'm have to realize the gain at that point well what if I don't want to realize the gain I wasn't planning on selling the property then you could think well it would seem reasonable then that if you buy similar property uh then maybe you could maybe you can have a situation where you don't take the gain at that point in time but you would have to then adjust the basis so that so that when you do sell the property you realize the gain at the point just sell the property so to do this you must generally be replacing property within two years after the close of the first tax year in which any part of your gain is realized so in certain circumstances the replacement period can be can be greater than two years you can see replacement period in publication 547 for more information the cost of the replacement property must be equal to or more than the net insurance or other payment you received more information for more information on business and non-business casualty and theft losses you can see publication 547 how to report if you had a casualty or theft that involved property used in your rental activity figure the net gain or loss in section b of form 4684 casualty and thefts follow the instructions for form 4684 for where to carry your net gain or loss example so in february 2017 mary bought a rental house for 135 thousand dollars house 120 thousand and land 15 thousand dollars and immediately began renting it out in 2022 she rented it 12 months for a monthly rental fee of $1,125 in addition to her rental income of 13,500 which is the 1,125 times 12 months mary have the following expenses mortgage interest a thousand fire insurance 250 miscellaneous repairs for 400 real estate taxes imposed and paid 500 maintenance 200 mary depreciates the residential rental property under makers gds the standard depreciation method for the property this means using the straight line method over a recovery period of 27.5 years she uses table 2-2 d to figure her depreciation percent because she placed the property in service in february 2017 she continues to use that row of table 2-2 d for year six the rate is so that's the depreciation on it using the table method mary figures her net rental income or loss for the house as follows so she's got the total rental received at 13,500 that's to 1,125 times 12 minus the expenses mortgage interest 8,000 fire insurance 250 miscellaneous repairs 400 real estate taxes 500 maintenance 200 gets total expenses 9,350 the balance 13,500 minus the 9,350 gives the 4,150 plus she's got the depreciation which she has to calculate using the the the rules that the iris gives us the 120,000 just for the building not the land portion of the property times the 3.636 rate from the table gives us depreciation 4,363 and so she's got a loss of 213 dollars so mary had a net loss for the year because she actively participated in her passive rental real estate activity and her loss was less than 25,000 she can deduct the loss on her return mary also meets all the requirements for not having to file form 8582 so in other words she has a loss she actively participates so she has and she's not over the income limit of 150,000 it's not phasing out or anything so she's and so she can take up to 25,000 of the loss her loss isn't that big so she should be able to take it against other income she uses schedule e part one to report her rental income and expenses she enters her income expenses and depreciation for the house in the column for property a and enters her loss online 22 form 4562 isn't required