 Income Tax 2021-2022 Software Example Reporting Rental Income Expenses and Losses Get Ready to Get Refunds to the Max Diving in the Income Tax 2021-2022 LASERT Tax Software You Don't Need Tax Software to Follow Along But You Might Want to Have Access to the Forms and Schedules Which You Could Find on the IRS Website at irs.gov starting point we got the single file or Adam Smith living in Beverly Hills 90210 starting with the W-2 Income at the 100,000, 12,550 standard deduction to get us down to the taxable income 87,450, page 2 calculating the tax at the 15,015 line number 6 back to page 1 and we're thinking about the rental property now which typically would be reported on the Schedule E but you can imagine situations where you might report it on the Schedule C so just to take a look at those differences we'll go back and forth from a W-2 income here to the Schedule C and then spend more time on the Schedule E when might you report the rental income on a Schedule C as opposed to a Schedule E let's go to a quick recap Schedule C form 1040 profit or loss from business generally Schedule C is used when you provide substantial services in conjunction with the property or the rental is part of a trade or business as a real estate dealer providing substantial services what does that mean if you provide substantial services that are primarily for the tenants convenience such as regular cleaning changing linen or maid service you report your rental income and expenses on Schedule C so it's kind of like more you'd be doing stuff that you might expect like in a hotel which has a substantial service component to it used for 1065 U.S. return of partnership income if your rental activity is a partnership including a partnership with your spouse unless it is qualified joint venture so we have that partnership type of situation the partnership return would then be reporting the income flowing then through to the 1040s for the partners with the use of the K1s substantial services don't include the furnishing of heat and light cleaning of public areas trash collection etc for more information you can see publication 334 so the W2 situation is fairly straightforward let's go to the Schedule C type of situation let's say we remove remove the income from the W2 and then we go to the Schedule C first and then we'll go to the Schedule E it says a restaurant but we're assuming it's it's rental property here we're going to say this is 120,000 and then I'll put 20,000 in just some random expense for accounting got a pair accounting well right and then we're going to go back on over and say this is going to be the forms and so now we've got the Schedule C so now when it flows in to page one it's going through line eight if I go to the Schedule C just to look at the distinctions between the schedules and to consider what you as the taxpayer might be wanting to do in terms of how you can report in your income or how you want to set things up would be on the Schedule C you've got the 120 minus the expenses the expenses of course being deductible in order to generate revenue if they're ordinary and necessary that gets us to the 100,000 that 100,000 then flows to the Schedule 1 and on the Schedule 1 we have our income that's going to go then to the 1040 here it is on the 1040 however we also have the self-employment tax and this is huge because that's what could be a distinguishing factor that's reported here this is a Social Security in Medicare and it's being calculated at the 14129 which flows through to the Schedule 2 there's the 14129 which flows through to the 1040 page number two so now we not only have the tax being calculated up top but we also have the added tax that's being included in which is the self-employment tax now half of that tax is deducted for self-employment over here if I go back to the self-employment half of it's deducted so that's going to be flowing through to the Schedule 1 and page 2 so there's the 7065 which flows into the form 1040 so now we've got the 100,000 but we get to deduct at least some of the self-employment tax to bring down the adjusted gross income and we've got the qualified business income deduction I won't get into in detail here that may apply and so we've could that could be a factor as well and then on page 2 we've got the federal income tax and then you got that huge Social Security so those are some of the things that could be a factor now also realize that if you had a loss with the Schedule C it's likelier more likely that you don't have as many restrictions to take it so in other words if I had my loss was if I said this was 150 let's say it was 200,000 so I lost 80,000 right if I go back to my Schedule C now I've got a loss of the 80,000 that's flowing ultimately through to the form 1040 now I don't have any income against it if I had W2 income I might be able to take that against the W2 income depending on the circumstances or at least I have less restriction to do that so now I got W2 income I've got this huge loss and because I was actively participating the assumption being in the Schedule C I'm not running into the same kind of passive activity rules and limitations now just realize that if you're married if you're married you also have that kind of situation you got to deal with with the Social Security in particular so if I say we're married now for taxes you're kind of one entity for federal income taxes but the Social Security is still applied out per person so you got to determine what state like what states you're in to see if you can I'm going to bring this back to let's bring this back to 20,000 to determine if you're in joint custody property or something you might be able to then say that it's a joint return now and then if I go back on over just to get an idea of this is it community is it a community property state or not could have an impact on your capacity to make do this process so then we have the Schedule C so we got the same 100,000 and the 100,000 but the point is that here if it flows into the Schedule SE then you actually have two of them because the self-employment needs to be applied out to the two here Adam and Eve so that when they get their benefits they have this taken into consideration that's one of the big factors with the Schedule C why it's important to have that breakout broken out properly so another way you could do that is of course treat the two married couples individuals as a partnership and file the partnership return and have the K-1 flow through to the two individuals as well and then you can also look under the rules for a qualified joint venture as well for the reporting rules but I'm going to go back to the taxpayer here and we're going to bring it back to a single let's bring it back to single now and so then if I go back on over now we have the single file let's get rid of the W2 income and now let's move it on over to the Schedule E so I'm going to go over to the Schedule E so this is where we're at now so I'm going to go back on over here and say let's remove the Schedule C stuff and let's move to the Schedule E which I'm not going to put just the 100,000 we got a little bit more complex stuff but now we've got the Schedule E so I'm going to go on over to the Schedule E so instead of the Schedule C which now has nothing in it although we still have it there because I didn't delete the cut we got to go to Schedule E so the Schedule E now is going to give us the property it looks a little bit different in the layout but it's in essence an income statement so we have the revenue minus the expenses we got some more expenses that are involved here let's bring it so we have income on it to start off with and so I'm going to go back down and say we have income so there's going to be our income and then that is going to flow in to the Schedule 1 so there it is on Schedule 1 and then the form 1040 I didn't do the exact same amount of income but there's the 1040 and then we don't have the self-employment tax so then we got the standard deduction we don't see a line 13 generally the qualified business income and there's the tax but then on page two we don't see that other tax for the self-employment possibly so you got some kind of pros and cons with the Schedule C to the Schedule E meaning Schedule C you might don't have to worry about the passive loss kind of stuff so much so that could make things easier but you might have the self-employment tax that is going to be involved in it as well and so there's you know if you're trying to think about how you're going to structure your business to see where you will categorize you're going to take those things into considerations if you're kind of on the border now if you have losses that's when this whole kind of thing comes into play on the Schedule E because on the Schedule E note that if I if I invest into a property then I probably am hoping that just the value of the property goes up I'm not just making money on the rental activity like I might be doing with a Schedule C like service business where I'm just trying to generate revenue from year to year Schedule E I'm hoping the property goes up in value so that means that I could take losses and still be fairly content so and note the IRS is more skeptical therefore of losses so you can see those down here the form 6198 and the form 8582 are going to be some of the things that you be concerned with with losses now if you have income then the IRS is happy to take their share not not a problem but if you have a loss then that's when it gets into the problems that could happen so let's say we have a loss here let's bring the loss up so I'll say that we've got let's say this is 180,000 and that should bring us to a loss right so now we have the loss so the income is at the 120,000 minus then the expenses minus the expenses of 194.040 with the loss 74,040 we've got the two things that could take place that would limit the loss those would be the at-risk rules and then the the passive activity rules again these kind of apply to the losses because if you had income the IRS is happy to take their share of the income if they have losses the IRS might limit those losses now the first one is not as likely to be applicable for like individual most investors reporting on a schedule E it might be more likely on a pass-through type of entity like a partnership or an S corporation and it could arise for example if if you're hitting the at-risk rules meaning you're not at risk possibly due to for example having a loan let's say where they don't have the recourse towards you if you default on the loan so you've invested money that you're not really at risk for that's the kind of limitation that would be involved there for most people that are investing in the property that aren't like reported on the schedule E then you are at risk at that point that's why the passive rules are usually the ones that gonna kind of kick in there but that form 6198 is down here we're gonna say 6198 you can check it out form 6198 is the at-risk limitations and obviously you can look at the instructions and so on for it to dive into it in more depth if it's applicable and then we've got the the passive activity rules which are form 8582 and that one you can see is kicking in here form 8582 is the passive activity loss limitation so we had our loss of the 74,040 and then you've got your your limitation that is taking place and ultimately calculating down here to give you that 25 so we'll go into that in a bit more detail in a second but first let's just just imagine that if we put in an at-risk kind of limit here up top that one would be applied out so I could say okay what if we said that we had the amount at risk was 50,000 just to see that apply out here and so now you've got it limited so our loss was at 74,040 and it limited you know limited here and then it limited with the 25,000 so let's go back on over and say that's not often may not be the case and let's go back on over to here so now we've got the loss of the 74,040 but it's being limited to the 25,000 down below now this is where the three kind of terms come come into play meaning is it completely passive do you actively participate or you know are you a real estate professional so actively participating is usually what is required to get this deduction the 25,000 so if I went back on over for example and we said that we did not actively participate if we did not actively participate then you're gonna have a you're gonna have a limitation and you can see the loss then not flowing in to the first page of the form 1040 even if I had some other income here you might have like w2 income for example of the 100,000 100,000 that you'd like to take a loss against so it's not flowing through but if I say I actively participate so we're going to say okay I actively participate then now that 25,000 uh is flowing through here that you could see the activity basically flowing through from the schedule e and then if I say I'm a real estate professional if I say I'm a real estate professional then the software is saying I'm going to allow the 7440 in essence rolling rolling through here so those terms are going to be important and you're going to want to be thinking okay what is it what do I need to do to go from completely passive if I have a loss particularly to be actively participating to be like a real estate professional now that 25,000 will will phase out so let's bring it back to the 25,000 and let's say that we actively participate so we get that that 25,000 so if your agi goes over like 100,000 then that could start to to phase out so let's say that I've got income of 120,000 and I go back on over to the forms you can see it's basically phasing out with a with an income limitation which you could see on the calculation for the passive activity rules here I won't go through the whole calculation but you got basically the limitation that is going to be imposed upon it for your agi as you go over the 100,000 okay so let's bring it back then to to the 100,000 so now we're picking up that that loss at the 25 again and you would think that everything should double if you got married now so if Sam got married to or Adam got married to Eve here then we're going to say okay but now they they're married now so married filing jointly and we pull it back on over and you'd think that you'd think maybe you'd get like 50,000 of the loss but no like even if I say it's a joint venture here we're going to say it's at you know the 20 the 25,000 on the loss and the limitation is similar to so if I bring the income up over the 100,000 for the phase out you think the phase out would be like 200,000 now 120,000 now for the married it's still reducing the loss so it's kind of a kind of a funny funny thing for the for the that that that weird rule and you could see it kind of happened kind of like strangely in the law you can imagine what happened they said people are taking advantage of the rental real estate losses that on this passive activity so we need to just make it all passive and then they make it all passive but then you got real estate professionals saying that's not fair because other people get to take losses and I'm an actual real estate professional you're hurting me so we're going to put it back in but we're going to put these weird rules on it and then the real weird rules don't make a lot of sense when you go from married to married filing separate to single to so on so you know it gets kind of that's where it landed now when you got the depreciable stuff you might have to file the form of 4562 depreciation and amortization and you could see some is recaps you know some of the depreciation and amortization here and typically the software will have a more in-depth schedule which won't just group it by the categories here but give you the give you the the play by play as we saw in a prior presentation when we entered this information for the building the furniture in the land and so on and so forth so you might not be required to attach a schedule like this but you should have a schedule like this and if you're going from one tax preparer to another tax preparer in particular the new one's going to need a schedule like this even if it's not required to be filed with the tax return so just keep that in mind now you could also have a situation where you have multiple properties now so now you can see on the form we've got property a property b and then the information related to them i'm going to say 365 on 365 on this one two and so you got your income statement for property a and property b and so i just put two in here one has a loss the other have income if they're similar in nature in terms of their passive you know activity status you would think that even though you can't take the 74,040 against w2 income you're limited in the passive activity rules possibly to the 25,000 that you could take it against other similar passive activity income so in this case we've got the two properties that are kind of similar in nature so you would think that you could net them out would be the general idea so you could have a you could also think about the choice to treat all interests as one activity and make a type of election at that just to give a quick look at that here if you were a real if you were a real estate professional and had more than one rental real estate interest during the year so for a real estate professional remember those big terms are you completely passive actively participating or a real estate professional you can choose to treat all the interests as one activity you can make this choice for any tax year that you qualify as a real estate professional that is if you forego making the choice for one year you can still make it for a later year if you make the choice it is binding for the tax year you make it and for any later year that you are a that you are a real estate professional now if we go back to the original scenario you also have this issue of this unallowed kind of loss that we have here so if we've got a loss of the 75 or the 74040 and we only get to take 25 then are we just going to lose the 49 40 and you can kind of see the calculation of that on the passive activity here so we see the loss calculation and then the 49 40 the unallowed loss now generally you would think you could take that and roll it forward into the next period to basically see if we have income in the next period possibly taking you know the loss up to 25 000 in the following period and then if and then taking you know if there's any income against it you can basically net it out which can't do of course is net it out against the the ordinary income so they're kind of like two income streams in their own track you got to net out losses against losses that are of a similar nature passive a nature in this case so for example if you had prior year losses of 100 000 that that you're going to roll forward into the current year then you couldn't really take them because you already have losses in the current year but you could see it kind of calculated on the passive activity so these are the current year losses the prior year losses the 174 000 and then on page two then we've got the losses that would be carrying forward which would be the prior year losses plus the current year losses minus what we're taking in the current year of the 25 000 to be rolling forward the unallowed 149 40 so now let's say we had income in the current year we had 100 000 loss that were carrying forward and we had income in the current year and so let's say that on the schedule e we had income of of the 100 000 or so and so we'll say okay now we've got income here and so the revenue minus the expenses is going to be the income which was 120 000 minus the expenses which come out to 34 minus 34 0 4 0 that gives us our 85 9 60 and now we've got this amount coming in from the passive not limiting us but possibly allowing us a deduction that's kind of rolling over from the prior year at the 100 000 which is netting out so then if i go to the passive rules you can see here now we've got the the 85 000 active and then the 100 000 prior year to give us that 14 14 which is rolling in to the 10 40 so even though we had income we're netting out the 100 000 that we rolled for that we didn't get to take we're imagining in the prior year and then we would still have the limitation of the 25 000 that we didn't get to in the current year so if i made for example my income a little bit less like 40 000 then we get that 25 000 a limit that we're going to be that we're going to have so basically if you got the loss and you're an active participant it might be capped at that 25 000 or less if you got the phase out for the agi limitation and then you might be able to get a benefit by rolling it forward but you're only going to get a benefit if it's not already being eaten up by losses in the future year 25 000 possibly a year anything else rolls forward until it can be matched up against some other kind of form of passive income is kind of the general idea that you'd want in your head