 Income tax 2022-2023. Rental property, personal use, dividing expenses. Let's do some wealth preservation with some tax preparation. 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. 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 online one income remember on the first half of the income tax formula is in essence and income statement although just an outline other forms and schedules flowing into these line items one of those of the schedule in essence and income statement in and of itself with rental income minus rental expenses the net rental income flowing into line one income of our income tax formula remember that when we're thinking about rental property as when we're thinking about kind of business activities in general we would like to be parsing out separating the personal from the business because that helps us to better be able to do the bookkeeping as well as make decisions and budgets out into the future and of course do the tax preparation situation so we've taken a look at scenarios where we have rental property that's designated 100% as rental property then we want to consider those situations where we can't get around some of this co-mingling situation with the personal and the rental where we often have to think about how we're going to be breaking out personal and rental so we can properly allocate mainly the expenses is what we're focused on here because obviously the income we wouldn't have any income if it was personal we need to properly be breaking out the expenses between the rental and the personal okay personal use of dwelling unit including the vacation home when we think about personal use there's a couple scenarios we can be thinking of we might think of a situation where we have like a vacation home another piece of property not our primary residence that we rent for part of the year or possibly use personally for part of the year or we can think about a situation where we have a home or a place that we live in and we rent part of it out so now we have the fraction of the place that we rent out or a situation in which we have a conversion from personal property to the rental property so now we have a fraction of the year where it's personal versus business those are the general scenarios where we get this personal business scenario lined up here we're talking about the including of the vacation home situation so if you have any personal use of a dwelling unit including a vacation home that you rent you must divide your expenses between the rental use and personal use in general notice it says expenses here not the income obviously because the income is all from rental you wouldn't have any personal income so with the expenses of the income statement we need to be breaking out in general your rental expenses will be no more than your total expenses multiplied by the fraction the denominator of which is the total number of days the dwelling unit is used and the number of which is the total number of days actually rented at a fair rental price so we're gonna have to be coming up with a ratio kind of analysis in order to be breaking out these expenses now you can imagine different ways to calculate that ratio which might be more or less fair or or advantageous for the renter so obviously we have to be in compliance with tax code on how to calculate the ratio only your rental expenses may be deducted on schedule e form 1040 some of your personal expenses may be deductible on schedule a form 1040 if you itemize your deductions we have a similar situation we saw in prior presentations where when we're talking about income taxes the natural thing that we would expect to be able to deduct are those expenses we need in order to and to generate the revenue so we don't typically get to deduct personal expenses although there's exceptions of course the whole schedule a has is full of exceptions to the general rule such as if it was your personal residence you might be able to deduct the mortgage interest for example and property taxes so here we're breaking it out we're gonna be applying the portion that is appropriate to the schedule e being able to hopefully take the deduction on the schedule e and then the personal side the question is kid you deducted somewhere else like a schedule a you must also determine if the dwelling unit is considered a home the amount of rental expenses that you can deduct may be limited if the dwelling unit is considered a home whether a dwelling unit is considered a home depends on how many days during the year are considered to be days of personal use there is a special rule if you use the dwelling unit as a home and you rented it for less than 15 days during the year so if you have a home and you you rent it for less than 15 days well that's you might consider that to be basically in material from the iris perspective so so in that case you might not have to record the income or the expenses the idea from the iris perspective would probably be well if you only had 15 days of rental of the property it might be a likely that you have a loss and the iris doesn't want you to allow you to to have a loss for this minimal amount of days because your expenses might be greater than the income that you got for you know 15 days so in any case dwelling unit a dwelling unit includes a house apartment condominium mobile home boat vacation home or similar property it also includes all structures or other property belonging to the dwelling unit a dwelling unit has basic living accommodations such as a sleeping space a toilet and a cooking facilities so it's pretty broad in spectrum here you got houses you got boats you got mobile homes but you got to have the general living things you need which is the toilet and the cooking facilities and the living accommodations so a dwelling unit doesn't include property or part of the property used solely as a hotel motel in or similar establishment property used solely as a hotel motel in or similar establishment if it is regularly available for occupancy by paying customers and isn't used by an owner as a home during the year example you rent a room in your home that is always available for short-term occupancy by paying customers you don't use the room yourself and you allow only paying customers to use the room so now you've got your your room that you're renting out it's not for personal use you're breaking that part out from your personal usage you didn't use it during the year for personal the room is used solely as a hotel motel in or similar establishment and isn't a dwelling unit so in that case you're using it more as a hotel kind of situation than a dwelling unit and some of the the distinctions you might have or think about in a hotel or motel type of situation is that you are you're probably providing a substantial amount of services you know cleaning and and maintenance and that kind of stuff in the hotel as opposed to a traditional kind of renting situation where your the primary activity might not be providing services cleaning and that kind of stuff but rather just the property itself being rented you know generating the money and more of a passive kind of situation so dividing expenses if you use a dwelling unit for both rental and personal purposes divide your expenses between the rental use and personal use based on the number of days used for each purpose so when dividing your expenses follow these rules here's where we get to the nitty and the gritty so the nitty gritty here so any day that the unit is rented at a fair rental price is a day of rental use even if you used the unit for personal purposes that day this rule doesn't apply when determining whether you use the unit as a home so any day that the unit is available for rent but not actually rented isn't a day for rental use so that's where it gets kind of messy because you're saying because what we would like to be able to say generally from our perspective would be I want to have the ratio that's going towards the rental property as high as possible so if it if it wasn't being rented but was available to be rented I would like to be able to count that as a day that is going towards rental use and the IRS could be more stringent than that from the IRS's perspective obviously you would think they would want to lean towards the personal side of the use because that will limit the amount of expenses so again any day that the unit is available for rent but not actually rented isn't a day of rental use fair rental price a fair rental price for your property is generally the amount of rent that a person who isn't related to you would be willing to pay now this is another area that's a huge pitfall with rental properties that causes all kinds of confusions and whatnot which is that if you're renting to someone that that is a relative or something like that then you don't have a fair market transaction oftentimes and the prices get messed up so so then the so then you have to be saying well I'm renting it at a fair rental price whatever that is based on the market so you would think that you can do some kind of appraisal according to the market to see what that is which is difficult because each piece of real estate is unique so you have that situation so the rent you charge isn't a fair rental price if it is substantially less than the rents charged for other properties that are similar to your property in your area so ask yourself the following questions when comparing another property with yours is it used for the same purpose is it approximately the same size is it in approximately the same condition does it have similar furnishings is it in a similar location if any of the following answers are no the properties probably aren't similar example so your beach cottage my good old beach cottage I love that thing your beach cottage was available for rent from June 1st through August 31st on 92 days except for the first week in August seven days when you are unable to find a renter you rented the you rented the cottage at a fair rental price during that time the person who rented the cottage for July allowed you to use it over the weekend two days without any reduction in or refund of rent your family also used the cottage during the last two weeks of May 14 days the cottage wasn't used at all before May 17 or after August 31st all right so let's figure the part of the cottage expenses to treat as rental expenses all right so the cottage was used for rental a total of 85 days so that's the 92 days that you you had it for rent but you couldn't get someone in it for the seven days that's where we get to the 85 days we we on our end would like to use the 92 number but no they're saying the iris says no 85 uh so the days it was available for rent but not rented seven days aren't days of rental use so we had to take those out bummer so the July weekend two days you used it is rental use because you received a fair rental price so you're gonna say well what about those two days that I actually used it but I still received the full rental price so you would expect that that didn't didn't hamper the personal use and the renting use so we get those two days so that's good you used it rental because you received the fair price so you used the cottage for personal purposes for 14 days the last two weeks we had two weeks of personal use the total use of the cottage was 99 days 14 days personal use 85 days rental use so your rental expense are 85 divided by 99 or 86 percent note that if you didn't have this guidance you might make different kind of assumptions with regards to the percent allocation and obviously on the taxpayer side of things you would probably lean towards trying to maximize the percent that's for the rental side so that you can maximize your expenses so just for comparison purposes if you didn't have this guidance you might assume something like this you might say hey look I had this this cottage was out there for rent all a year and then I only used it for 14 days so let's say you might say something like well it was out there for 365 days minus the 14 days that I used it it was available you know 351 days rental so 351 divided by 365 is like 96 percent rental right you could you can imagine coming up coming up with that kind of calculation comparing it to the total number of days but notice it's the code the code is saying we want you to see the days that are in use so you had it 85 days of rental and then you used it for two weeks so that's going to be the 14 days so so notice when we when we do our ratios your rental expenses are 85 days over the 99 the 99 being the 85 plus the 14 which is far less than the number of days in the year which is 365 so again you can kind of imagine if you made different assumptions like very different type of ratios here that would be favoring either the taxpayer or the IRS in different situations so the the tax code of course is trying to nail down what that ratio kind of assumption should be all right note when determining whether you use the cottage as a home the july weekend two two days you used it is considered personal use even though you received a fair rental price for the weekend so when determining whether you use the cottage as a home which is you know a different that was a different thing that we had to determine whether it's going to be used as a home versus our calculation here which is the figuring the part of the cottage expenses to treat as rental expenses okay and then therefore you had 16 days of personal use and 83 days of rental use for this purpose because you use the cottage for personal purposes more than 14 days and more than 10 percent of the days of rental use eight days you used it as a home so if you have a net loss you may not be able to deduct all of the rental expenses so now we're running into that net loss type of situation remembering that the iris is going to be quite skeptical of the losses they want a piece of your income and that they're going to be skeptical of the losses so to see that we can see dwelling unit used as a home and we'll continue with that in a future presentation