 Income tax 2022-2023 residential rental property introduction. 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. Looking at the income tax formula, we're focused on line one income. Remember, in the first half of the income tax formula is in essence an income statement, but just an outline, a scaffolding, other forms and schedules flowing into each of these line items. One of those, the Schedule E for rental property, it being an income statement in and of itself with rental income minus rental expenses, the net rental income in essence flowing into line one income of our income tax formula. Let's start off by thinking about what's new with the rental properties, standard mileage rate for 2022, the standard mileage rate for the cost of operating your car, van pickup or panel truck between January 1st, 2022 to June 30th, 2022 is 58.5 cents per mile. So we'll talk more about the deductions that might be allowable for the rental property. And when we talk about the auto miles, we have that 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. The idea of taking the actual deductions or the mileage method and then of course we would expect the mileage method amounts to be changed each year so they can keep in pace with inflation. So the business standard mileage rate for July 1st, 2022 to December 31st, 2022 is 62.5 cents per mile. So they actually kind of broke it up halfway through the year, possibly because of the inflation during the years they had to kind of break it out, which makes it a little bit more confusing to calculate but not too bad. So excess business loss limitation. If you report a loss on line 26, 32, 37 or 39 of your schedule E form 1040, yeah, maybe subject to a business loss limitation. So note when you have rental income, one of the things or any kind of income in general, but rental income here is our focus. Anytime you have a loss, the IRS is skeptical of losses because the IRS wants to be your silent partner, taking a piece of your income but not needing to take on the risk of losses because if you have the loss, you might be able to take that against other income. So whenever we think about rental property, we're always thinking about that situation. What happens when there's a loss? Are there limitations to the loss which we'll get into in future presentations? So the disallowed loss resulting from the limitation will not be reflected on line 26, 32, 37 or 39 of your schedule E. Instead, use form 461 to determine the amount of your excess business loss, which will be included as income on schedule one form 1040 line 8P. Any disallowed loss resulting from this limitation will be treated as a net operating loss that must be carried forward and deducted in a subsequent year. So you can see form 461 and its instructions for details on the excess business loss limitations. Then we've got the section 179 deduction dollar limits. For tax years beginning 2022, the maximum section 179 expense deduction is $1,080,000. This limit is reduced by the amount by which cost of section 179 property placed in service during the tax year exceeds $2,700,000. So 179 has to do with depreciable property and whether or not you might be able to get more depreciation in the first year that you put the property in place. So the general idea with the depreciation is that you have to put it on the books as an asset, not expensing it in the year of purchase, but allocating the cost over its useful life. And then they have these special depreciation and 179 depreciations, which may allow you to take more depreciation in the first year. So we might dive into that more in future presentations. Form 7205 energy efficient commercial building deduction. This new form and its separate instructions are used to claim the IRC 179D deduction for qualifying energy efficient commercial building expenses. Qualified paid sick leave and qualified paid family leave payroll tax credit. So the amount of any payroll tax credit taken by an employer for the qualified paid sick leave and qualified paid family leave under the family's first Coronavirus Response Act. That's the FFCRA and the American Rescue Act, the ARP. The ARP must be included in income. So that's kind of more of a special situation that obviously came about due to the response with the Coronavirus pandemic. So you can see form 941. It has to do with payroll 941 being the payroll form. So if you have employees, you'll be dealing with W2s, W3s, 941s and so on. And then the question is, does this qualified paid sick leave apply to you in that instance? So again, C form 941, lines 11B, 11D, 13C and 13E and form 944 outlines 8B, 8D, 10D and 10F. You must include the full amount, both the refundable and non-refundable portions of the credit for qualified sick and family leave wages and gross income on line 3 or 4 as applicable for the tax year that includes the last day of any calendar quarter with respect to which a credit is allowed. Note, a credit is available only if the leave was taken after March 31, 2020 and before October 1, 2021 and only after the qualified leave wages and wages and tips were paid, which might under certain circumstances not occur until a quarter after September 30, 2021 including quarters during 2022 accordingly. All lines related to qualified sick and family leave wages remain on the employment tax returns for 2022. Reminders, net investment income tax, the NIIT. You may be subject to the NIIT, the net investment income tax. NIIT is a 3.8% tax on the lesser of net investment income or the excess of modified adjusted gross income. MAGI, basically your AGI, your adjusted gross income with some slight modifications, modified adjusted gross income over the threshold amount. So net investment income may include rental income and other income from passive activities. And this is one of the issues with rental property. One reason we oftentimes report it differently or on another form other than a Schedule C. You might think, why don't we just report the rental property on the Schedule C because it's basically an income statement related to rental property with income minus expenses that rolls into the first page of the Form 1040 ultimately like a Schedule C. That's what the Schedule E is doing as well. But the Schedule E, when we think about the rental property, sometimes we run into this issue of a passive income that could have other tax implications related to it. And we also have possibly some differences with regards to then whether it's going to be subject to self-employment tax. So we'll dive in some of those issues in future presentation. Self-employed tax payments deferred from 2020. If you elect to defer self-employed tax payments from 2020, see how self-employed individuals and household employers repay deferred social security tax for more information about due dates and payment options. This is another unusual item of response to the coronavirus. And we can compare this response to the response they had to an employee, employer type of situation, which I think is useful because this is a common kind of scenario that comes up when the log is basically rolled out. So what they wanted to do was create a scenario where the employers can hold on to their employees longer during this time when they were shutting down businesses, even though their cash flow is, of course, going to be tight during that time. One solution could be, well, maybe we can defer the payroll taxes, paying the payroll taxes later. And anytime some idea like that comes up, what will then happen is people will say, well, what about the self-employed individuals? Because the self-employed individuals have to treat themselves as though there are an employer and employee of themselves. They're subject to social security and Medicare. They should get a similar kind of benefit. So that's a common theme that you will see happen. The law is going to be aimed at the big corporations and then things like the flow-through companies, the partnerships, the sole proprietors are going to be like, okay, wait a second, you're giving them this big benefit, we should have a similar kind of thing happening on the smaller side of things. So in any case, introduction, do you own a second house that you rent out all the time? Do you own a vacation home that you rent out when you or your family isn't using it? These are two common types of residential rental activities discussed in this publication that we're going to go through here. In most cases, all rental income must be reported on your tax return. That's the general rule for income in general. Everything to the IRS is basically income unless there's an exception to it. We have an income tax type of system. That means that income is actually bad, right? Because if you have income, that means you're going to be subject to the income tax on it. What we would like to have is actual income, stuff that we received that the IRS says is exempt from income that we don't have to be paying taxes on. But obviously, if we've got rental income, you would think that the IRS would want their share of the rental income. But there are differences and the expenses you are allowed to deduct and in the way the rental activity is reported on your return. So we can think of a lot of different kind of unusual scenarios with the rental property. And just remember, the rental property can be different than other types of businesses that we might think of. When we think about a Schedule C type of business, we report that on the Schedule C. We've got income minus expenses on it. And then we have to be subject to the self-employment tax, which could be quite significant. And if we have a loss, oftentimes we might be able to offset the loss, for example, against other income. When we have the rental property, we report it on a different schedule oftentimes for a few different reasons. One is that the IRS often thinks of the rental property as more of a passive type of income scenario, as opposed to the Schedule C, which is an active type of business scenario. And there could be tax differences in the treatment for passive type of income. So we'll get in and also there could be different limitations with regards to the losses that could be different than like a Schedule C and the self-employment tax could be a different kind of situation if we're talking about not active income or passive income. So you have a similar structure to a Schedule C. It's going to be an income statement, income minus expenses. But then you've got some of these other concepts that come into play that we need to take into consideration. Okay, Chapter 1, discuss rental for-profit activity in which there is no personal use of the property. This is going to be our breakdown and we'll go through a lot of these items. We might not go through all of the details in our presentations. You can take a look at the publications for more detail, but this is the general breakdown. So it examines some common types of rental income and when each is reported as well as some common types of expenses and which are deductible. Chapter 2 discusses depreciation as it applies to your rental real estate activity. Now, depreciation is going to be huge and oftentimes when people like first think about rental property, they don't really have a concept of depreciation opposed from or apart from like equipment depreciation and stuff rather than the building because they might be dealing with, you know, usually they deal with a home that isn't depreciated because it's personal property. And the fact that we get some deductions for the home or personal or principal residence kind of confuses things further. So the general idea remember for an income tax is if we have an income tax, then we have it would make sense for us to tax basically the net income and therefore you would expect the types of deductions that are legitimate deductions in a natural income tax system would be those deductions that were ordinary and necessary to generate the income so that you would be taxing not the gross income but the net income that would make sense because you had to expend the expenses to get the income and that would mean that personal expenses are usually not deductible under just a natural kind of income tax system. But oftentimes most people are dealing with taxes are dealing with people that have W2 income and the concept with the W2 income is that the employer is the one that's providing all the business expenses in order for the employee to earn the income. Therefore the employee just has income and doesn't really have any kind of expenses. So we don't see those kind of those natural expenses that you would expect to see in an income type tax system. And then the tax code tax on all these other deductions that for whatever political reasons or whatever reasons they put it in there such as what's on the schedule a a lot of the deductions on the schedule a deducting state taxes deducting mortgage interest which is the big one on real estate and property taxes on the real estate. Now those are personal as your personal home. So the question is well why would you get a deduction for real estate and interest on your personal residence. It's unnatural to a normal income tax kind of system because it's on your personal property rather than something that you had to expend in a business setting to kind of generate revenue. So the reasons are a little bit different when you so so then when you move on over to something like the rental income which is structured in a way that makes perfect sense for the most part where you have income from the rental income and expenses that you had to expend in order to generate that income. The net rental income is the amount that you would expect to be taxed on. Now obviously the actual property itself this time not being the principal residence but now being the rental property that the wear and tear or depreciation of the property that's going to be a huge kind of expense. So we've got to be dealing with depreciation of the property and that gets messy also when you're dealing with property that has a personal use and a as well as a business or rental use. OK chapter three covers the reporting of your rental income and deductions including casualties and thefts limitations on losses and claiming the correct amount of depreciation. So that limitation on losses is a big one because oftentimes people will have rental property for a long term investment time to try to generate capital gain and as they're trying to generate capital gain they might be running a loss on it right because the rental and they're not getting a lot of enough rental income to pay for the expenses. And then they're taking so they're taking the losses possibly against other income is what the iris is skeptical of as they are basically holding on to the property which might be not depreciating going down in value but appreciating in value and that's where the iris you know you get you get kind of skeptical with the rental property. In other words if they had a if it was a schedule see business and you're just a service business then your rental income if you had a loss then then you might be able to take the loss against the other income it's not like you have this other objective of the passive property just accumulating when you have the rental property. The long term objective might be that the rental property itself just accumulates upward due to just the value of the property possibly going up and then you have the rental kind of component on it where you're generating revenue or possibly taking losses that you can take against other other income or something like that as the property you know hopefully appreciates in value which is a little bit different scenario which again is a reason why we report oftentimes the rental property and the schedule see and deal with that passive passive income stuff as a schedule E as opposed to a schedule C okay chapter four discusses special rental situations this includes condominium, condominiums, corporatives property changed to rental use so if you had personal use and then you changed it to rental use that becomes difficult because you don't know what the basis of the property is or it's more difficult to know because you didn't just buy the property you converted it renting only part of your property so then you have a situation where now you're renting part of the property so how do you deal that because now you have this mixing of personal and business that you're going to have to break out in some way to properly calculate all this stuff and not for profit rental activity. Chapter five discuss the rules for rental income and expenses when there is also personal use of the dwelling unit such as a vacation home so notice chapter four we saw a situation where you might have like a rental property that's used partly for rental property so you might have you might be living in it for example and have have part of it being rental or something like that and five has another personal use kind of situation where you have like a vacation home the property is not one that's your is your personal residence but you might use it as a vacation home from time to time and then you might also rent it out as well so then now we have this question of well what is that property is it just a second vacation home is it just investment property is it rental property can we take losses on the vacation home you know for as it as a against other income is it you know that kind of stuff comes up so finally chapter six explains how to get tax help from the IRS and you could take we probably won't go into that one in detail but if you want to dive into that you can check out the publication chapter six alright sale or exchange of rental property for information on a figure on how to figure and report any gain or loss from the sale exchange or other dispositions of your rental property see publication five four four so obviously when we're dealing with the rental property we have the situation of trying to account for you know the depreciation on the rental property how are we going to do the schedule e calculations passive income and losses and that kind of stuff and then when you sell the rental property that becomes a big exercise in and of itself because because now you've got to deal with you know the depreciation on the rental property calculating the gain and everything on the rental property so specifically dealing with the sale you could dive into publication five four four sale of main home used as a rental property for information on how to figure and report any gain or loss from the sale or other disposition of your main home that you also used as rental property so this gets you could see publication five two three so now you're selling you had your home you used your home for rental property to some degree and now you're selling it that complicates things because if it was your main home and you didn't have the rental property you might usually get this big exclusion of the game and so that's usually a big tax benefit but if part of the home was used for rental property there could be an impact on the basis of the rental property what's the actual basis of the home now given the fact that part of it was depreciated possibly for rental property and then and then you know thinking about this and make this problem with the business versus personal use of the home and what that does with the possible exclusion for your principal residents alright tax free exchange of rental property occasionally used for personal purposes if you meet certain qualifying use standards you may qualify for a tax free exchange a like kind exchange or section 1031 exchange so the 1031 exchange is kind of an issue in and of itself so you can dive into that one of one piece of rental property you own for a similar piece of rental property even if you have used the rental property for personal purposes so if you're thinking about changing things up then that's when you might think about diving into more the details to qualify for a 1031 exchange so that you basically the general idea is that you can kind of defer the gain the gain rather than selling a rental property realizing a gain because obviously when you're dealing with the rental property if you're saying I'm going to go from this rental property and then I'm going to have another rental property or something like that if you had to sell the rental property and realize the gain you could have a significant amount of gain at that time because you might have held on to that rental property for a long time and because the dollar amount is just large in and of itself which could mean that you have a significant tax consequence and the tax consequence could be you know somewhat you can think kind of like well in any case you could have a significant tax consequence which could make it difficult for transactions to happen where basically you want to go from one rental property and then to another rental it kind of gets you stuck and so the idea would be well if you can have an exchange situation it allows the market to flow more without the taxes because taxes always throw kind of a wrench into the situation so that they can basically defer the gain to some degree given the rules of the 1031 exchange and allocate the basis of the property to the new property that they are selling that they are buying and then realize the gain when they sell the second property so that could be a whole other course in and of itself that we've been thinking about doing we might do at a future time but for now for more information on the qualifying use standards C Revenue Procedure 2008-16 2008-10 IRB 547 for more information on like kind exchanges you can see chapter 1 of publication 544 which you can find on the IRS website so obviously our rental property is a huge topic and so you can dive into other more specialized areas as well so here's some related publications useful items you may want to see publications include 463 Travel Gift and Car Expenses so those are general rules when we get into things that are going to be expenses what kind of expenses are deductible and then we get into some of the confusion related to travel and gift and car expenses 523 Selling Your Home 534 Depreciating Property Placed in Service Before 1987 Publication 535 Business Expenses so the general concept of expenses that will be applied to the rental property are going to be similar to general business expenses that need to be ordinary and necessary Publication 544 Sales and Other Dispositions of Assets Publication 547 Casualty Disaster and Thefts Publication 551 Basis of Assets to help us with our depreciation and possible sales and whatnot Publication 925 Passive Activity and At-Risk Rules remember when we deal with the rental property we might have to deal with those passive activities we might not need to deal with with a standard Schedule C situation Publication 946 How to Depreciate Property and then we have forms you can look at the forms and the instructions related to the forms as another source of reference you can check out from the IRS website Form 461 Excess Business Loss Limitations Form 4562 Depreciation and Amortization Form 5213 Election to Postpone Determination as to whether the presumption applies that an activity is engaged in for profit so is it a profit seeking kind of activity which is a useful tool to be I mean something that you got to basically prove if you're going to be taking in essence you know expenses related to it Form 7205 Energy Efficient Commercial Buildings Deduction Form 8582 Passive Activity Limitations Form 89060 Net Investment Income and of course form or Schedule E Form 1040 Supplemental Income and Loss