 Income tax 2021-2022. Residential rental property introduction. Get ready to get refunds to the max diving in the income tax 2021-2022. Most of this information can be found in publication 527 residential rental property tax year 2021 on the IRS website irs.gov irs.gov income tax formula line one income although we would have a subschedule basically an income statement with income and expenses expenses basically being deductions the net then is what rolls in to line one income of the income tax formula as well as page one eventually of the form 1040 this is the schedule E basically the income statement schedule we're focused on the supplemental income and loss we're focused here on the rental real estate so we're 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 and most cases all rental income must be reported on your tax return but there are differences in the expenses you are allowed to deduct and the way the rental activity is reported on your tax return real estate has a lot of added complications with regards to income taxes that we need to consider just to list a few of them here one would be the categorization of the real estate is the real estate use for personal use or is the real estate used for business use or rental use but this is important because with income taxes the natural things that we would expect to be able to deduct for them are those expenses that we incurred in order to generate the revenue the income tax therefore being applied not to gross income the top line but to the net income so something to set up as a business if you had to expend money to generate revenue those are the expenses we would naturally expect to be able to deduct so if the real estate is for personal use you would expect unless there's an exception which there are some that you would not be able to deduct it there if it was for business use the expenses related to that business generally you would expect those items to be the deductible items just like with any other kind of business when you co-mingle those things which is common in real estate because you might be using the property for both personal and business use then the question is well how are we going to divvy up the expenses for example how can we treat the expenses that are used for the generation of revenue versus those that are not it's also a little bit confusing with the categorization of real estate because it could be real estate for a home a residence it could be for investment property or it could be for the rental property for example and we know that when we have it categorized as say a home then we have an exception to the general rule of expenses only typically being deductible if they were used in order to generate revenue because we know that we can deduct things like the mortgage interest and property taxes for the personal residents on the itemized deductions so now we've got that kind of added you know bit of complexity that most people are kind of aware of but it's a little bit of a deviation from the standard kind of rule that you would see in a natural state of just like an income tax we also have the issue that the real estate often times when we invest in real estate it's not generally just to get the real estate income from the renting of the real estate but we're hoping that the property goes up over time so it's unlike other things that we purchase for a business for example if we're purchasing something for a business we usually purchase something consume its use in order to generate revenue through the production of something else or goods or services and the thing that we bought goes down in value obviously the real estate we're hoping will go up in value and in that sense you can think of it as more of a long-term kind of passive type of investment which the government's going to be skeptical of what they're going to call this kind of like passive type of investment they're also going to be skeptical of somebody being able to write off losses for the real estate for example losses are always something that the government's going to be skeptical of as you're basically holding the real estate kind of for investment purposes for a passive long-term kind of income so we end up with issues with regards to whether or not for example losses might be a deductible a deductible component and the the concept of basically having the rental property that you can that you can put on the books and write off deductions and contrasting that to the long-term possibly increase in the value of the property is something to consider just from an investment perspective so those are just a few things that kind of make the rental property a bit more complicated for the taxes to actually calculate the taxes as well as you got to take those things into consideration of course when investing in say real estate property and know what your goals are for the real estate property so chapter one we'll discuss rental rental for profit activity in which there is no personal use of the property so in some ways that's going to be a little bit easier because now we're going to say the rental property is just rental property it's not something that we're doing some rental and some personal on we got to get some categorizations on the rental property so we can start to think about how we're going to treat it with regards to taxation so it examines some common types of rental income and when which is reported as well as common as some common types of expenses and which are deductible chapter 2 discusses depreciation as it applies to your rental real estate activity what property can be depreciated and how much it can be depreciated depreciation is going to be a form of expense that of course gets a bit complicated as well because you got to follow the rules for the tax code as to how you can depreciate the property how long you can depreciate it over and again the depreciation gets more complex when the property is mixed between you know personal and business use for example chapter 3 covers the reporting of your rental income and deduction including casualties and thefts limitation on losses and claiming the correct amount of depreciation chapter number four discusses special rental situations this include condominiums corporates property charged to rental use renting only part of your property so there's the part of property item there and a not for profit rental activity chapter number five discusses the rules for rental income and expenses when there is also personal use of the dwelling unit such as a vacation home sale or exchange of rental property for information on how to figure and report any gain or loss from the sale exchange or other disposition of your rental property see publication 5 4 4 obviously then we have the issue with the rental property of selling the rental property or exchanging the rental property like a 1031 or something like that and that gets into a whole nother realm of of complications with regards to reporting the gains and losses with the sale so sale of in sale of main home used as rental property for information on how to figure and report any gain or loss from the sale of other dispositions of your main home that you also use as rental property see publication 5 3 5 2 3 so if you had your own home that you use part of it for rental property that count that causes complications for the sales item the when you sell the home because now you might have depreciated like part of the property and so really kind of like part of the property I was being used as basically rental property as opposed to the principal residence and then so you got to have questions with regards to how you're going to allocate that out and then of course when you think about exemptions with regards to selling the home and you were using part of it for rental those are all kind of questions that that come up with that situation and you can take a look again at publication 5 2 3 4 more detail there so you can find those on iris website iris.gov tax free exchange or rental property occasionally used for personal purpose if you meet certain qualified use standards you may qualify for a tax free exchange a like kind or section 1031 exchange of one piece of rental property you own for a similar piece of property even if you have used the rental property for personal purposes so there's you know the the exchanging of the property is obviously a big issue with the real estate as well because it might be a way that you can remove or at least defer the taxation on it so you can dive into more information with regards to it the exchange requirements for information on the qualifying use standards you can see revenue procedures 208-16208-10 our IRB 547 available an IRS website here's a list of related publications that you might want to reference or look into for further we've got the publication 463 travel gift and car expenses publication 5 2 3 selling your home 5 3 4 depreciating property placed in service before 1987 5 3 5 business expenses 5 4 4 sales and other dispositions of assets 5 4 7 casualties disasters and theft 5 5 1 business basis of assets 9 2 5 passive activity and at risk rules 9 4 6 how to depreciate property and these are going to be forms and instructions you might want to look into further as well you can find these on the iris website the 4 6 1 excess business loss limitation the 4 5 6 2 depreciation and amortization 5 2 1 3 election to postpone determination as to whether the presumption applies that an activity is engaged in for profit 8 5 8 2 passive activity loss limitation 8 9 6 8 9 6 0 net investment income tax individuals estates and trusts schedule e supplemental income and loss