 Income tax 2022-2023, rental property, renting part of property and change to rental use tax software examples. Let's do some wealth preservation with some tax preparation. Here we are in our example Form 1040 populated with LASERT tax software. You don't need tax software to follow along, but it's a great tool to run scenarios with. You can also get access to the Form 1040 related forms and schedules at the IRS website, irs.gov, irs.gov, starting point single filer Mr. Anderson 90210 Beverly Hills. We're just going to have the rental income flowing through at the 100,000 to start out with. That's coming from, of course, the Schedule E, which is the supplemental income and loss from rental real estate so on and so forth. Basically formatted in an income statement, structure, rental income minus rental expenses. Bottom line here, the 100,000, which in essence pulling into Schedule 1, which is pulling into Page 1, Form 1040. And we've got the standard deduction 12,950, giving us the taxable income, 87,050 tax, calculated Page Number 2, Total Tax 14774. Okay, so now we want to run a 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. Situation where we have a more complex situation where we have a piece of rental property that let's start out with is partially for business use. I'm partially for rental and we partially use it for personal or possibly live in it for personal. Then we're going to have a situation where some of the expenses we're going to have to break out. So this is kind of more of a bookkeeping type of thing that you could think about. So if we had basically our general income statement, we might have rental income, for example. And let's say the rental income is 8000, let's say it's going to be equal to 750 times 12. Let's say it was 9000 of the rental income. Let's put that on the outside. And then we've got our expenses. So I'll say expenses, expenses, and then let's say that we have the mortgage interest. And let's first think about the total expenses and then we'll have to break them out between rental and personal. So let's say the total mortgage interest is 1800. Let's say we have a fire insurance. Let's say that's 100. Let's say we have miscellaneous repairs on the rent. Let's say we have miscellaneous repairs rental. And then let's say we have real estate taxes of 1200. Let's say that's the total. So total expenses is going to be then the five total expenses. Let's sum them up here. So let me do this again. I had mortgage interest, fire insurance, miscellaneous repairs 291, total experience summing that up. Boom. So there we have that. Let's actually pull this back into the middle and let's put an underlying here and that would give us a net income of this minus this. However, I'm using it partially for personal use. So I'd have to figure out my personal use. Now the income is just going to be from rental property. It's going to be some of these expenses that I might have to break out between business and personal. How might we do that breakout? We might do something like a ratio analysis. So we might say something like we could take the square footage or whatever would be reasonable. Square footage is common or the rooms compared to the total number of rooms. So let's say that the rental is let's say 300 square feet and the total square feet for the place is 1200 equals 300 over 1200 percent. That would be 25 percent. So here's our percent rental. So the percent rental 25 percent. So then I'm going to say, okay, we need to break out the personal versus the rental here. So let's make this one a little smaller and let's say this is rental. Let's say personal and rental. And I'll make that our header. Let's actually pull this down a bit. I'm going to select these and insert above it, right click, insert. I know I'm doing this fast, but it's not an Excel course. So I don't want to, did I spell personal right? I doubt it. Of course not. That doesn't look right. Idiot. What am I going to change it? Change it. Make it right. All right. And then we're going to say this is going to be black and white and center it. And so we'll say for the income, it's all rental because obviously we didn't get income from the personal side. I'll indent these two just so we can see it a little more clear and dent that. But then on the expenses, we're going to have a breakout. So it's going to be 25 percent rental. So I'm going to say this is going to be equal to this times the 25 percent. Boom. So the personal side of it is going to be this minus this or it's going to be this times 0.75. However, you want to calculate it fire. We're going to assume that's for the whole place. Same thing then. It's going to be this times 25 percent for the rental. The personal will be the difference then. And then the miscellaneous I said was on the rental itself. So if it's on the rental itself, I'm just going to say that's part of the rental property. I don't have to break it out because I did repairs to the rental part of the property, not on the personal. So there's no breakout necessary as there is for these expenses, which are for the full property, which we then needed to break out. And then the real estate, I'm going to say is equal to this times the 0.25 and personal is this minus this. So there's our breakout. Let's put some underlying here. So my net income on the rental is really going to be this. Mine. I need to sum up the expenses. Sum up the expenses. Boom. So my net income is going to be something like this minus that the 7 934 here as opposed as opposed to this amount. We also have to deal with the depreciation might touch on in a second. But also note that some of these items like the mortgage interest, this personal side of the mortgage interest, I might still get a benefit from because I might be able to deduct on the schedule a same with the real estate taxes. But so it would be a breakout between schedule E and a so the total. Let's put the total over here. Just so we can see, make sure that my totals match up for these two. So the total still tie out to these totals. So that looks good. All right. So let's go ahead. I'm going to enter this data then into the system. So we'll say, okay, let's imagine this was our rental income statement. Let's go to the schedule E. And I'm going to say that we had a rental income of nine, let's say 9000. So this is what we would have thus far. We don't have the depreciation on there yet, but we've got the income statement then being populated the rents minus the portion of the expenses that are allocable to the rental property to get down to the net amount, which was that 7,934. Now the amounts for mortgage interest and property taxes aren't going to help me if I'm just having the standard deduction. But if they're significant enough to push us over to itemizing, then we might have to break those out into the itemized deductions, meaning you're going to have to take that mortgage interest statement and break it out according to the ratio between those two possible deductible items. So if I said we had the schedule A then, we're going to say the mortgage interest. Let's go to the interest is, we said on the personal side, I won three mortgage interest 1350. And then the taxes, we said was 900. So taxes, we're going to say on the real estate was 900. Now that's not going to be enough to kick me over the standard deduction, which in this case is the 12,950. But that mortgage interest and the property taxes as well as possibly state taxes are usually the thing that could possibly kick people over in that if I looked at the schedule A, if these amounts were greater than the standard deduction, then we'd be able to take those amounts. So we have to think about whether or not we're going to get the benefit from the mortgage interest and the real estate taxes and properly allocate them between a schedule A and a schedule E. Now then we would also have to put on the books the depreciation of the property and we'd have to think about what the cost of the property is. If we purchased it, it would be more straightforward. If we converted it, then we got to compare our cost basis to the fair market value. We got to make sure that we're breaking out building versus the land. So let's first just put that on the books. I'm going to say that we have a depreciable item. Now I'm going to indicate to the software that the basis is $39,000 for the building and $7,000 for the land. The land is not going to be depreciated. The building will, but it's going to be broken out. 25% of that is going to be the depreciable component to it. So if I go back on over and I say, okay, what happens with the depreciation schedules? So now it's the cost. Let's go to this one is $39,000. 25% of that is going to be that $7,950 for the depreciable basis because that's the amount I'm assuming is the rental property using our percentage. And then we have the straight line method. It's a mid month convention 27.5. This is the rate from the table gets us to that $310. And then if you went to depreciation for the next year, you could see it would be $355. And that depreciation is going to continue out for the 27.5 years. The land not depreciated. So if I go back on over to the schedule E, we have now added the depreciation to our calculation. If I was to do my bookkeeping, then of course that's something that I would probably need to add to my bookkeeping that will be dependent upon the calculation from the tax software to get this number to the bottom line. And our tax system adding the depreciation deduction to our calculation. Now another scenario that is similar to this scenario is let's say that we had, I'm going to delete this column, that we had someone that converted their personal property to the rental property. And then they had a partial year of rental in the first year. So now you're going to have a similar situation with your income statement that needs to be broken out in the portion that is personal versus the business portion that's going to be broken out. So for example, if I if I have these same numbers over here, representing this is income, income, income, representing the income and expenses for the entire year, then I've got to say, okay, what? Let's say the income, let's let's say the income was actually 11 months of renting. Let's say it was 750 times 11. So that's going to be the income that we had the expenses down below. I'm going to delete these and I'm going to come up with a new ratio analysis. It's going to be that months of the year for the rental, let's say was only was 11 months rental. And then we're saying months for personal. So let's say was was one month. So 11, this is going to be months for rental versus months for personal is one. So that means it's going to be equal to so the total months of course is 12. So months in year 12. I'm going to underline this or un-underline. So the amount that's going to be allocable to the rental is going to be equal to 11 over 12 the ratio 11 over 12 91.67% because that because we converted it starting at the end of, you know, in February. So you got 11 months rental one month personal, then you've got a similar breakout. The rental income is what it is because obviously when it was personal, we wouldn't have had any rental income. And then the rental side is going to be this times this again. I'm going to select F4 so that I could copy that down. However, if I had repairs that were designed just for the rental during the rental time, I mean, I could I could assign that just to the rental side of things. The personal side is going to be this minus this copying that down. And then I could sum it up summing up. There's going to be our expenses on that scenario type of situation. So a similar a similar kind of ratio calculation is going to be necessary, you know, when that conversion happened. But this time instead of happening all every year, it would only happen in that first month. And then we've got our adjustment here for our rental income. And then our depreciation. We'd have a similar kind of thing for the depreciation, but let's put this into our system. I'm going to imagine the depreciation is the same, but now I'm not going to be breaking it out between personal and business use. We're just going to have that 11 months, which will be calculated by the system because I put it on there. It's going to use that mid month convention. So now the depreciation, I'm assuming is going to be that 39,000 again, but we're not allocating between business and personal. We're just going to say that we put it on the books, you know, in the in the first or the second month, which means it's going to use a mid month convention, straight line mid month convention in order to get this time to the 1241, which is going to pull into the schedule. So now we've got our calculation here. There's the depreciation calculation. Now remember that when the conversion happens, because we didn't purchase the property, we might have to do some kind of calculation for what for what our basis is and compare it to the fair market value. And that might look something, something like this, we'd say, well, we had the house costs before we converted it whenever we bought it 25,000. And we're going to say then we remodeled it remodeled kitchen is going to be 4,200. We'll say when we did that recreation room we added was 5,800 good times in that room. New roof improvement, 1,600 and patio and deck. We're going to say 2,400. And so that's where we're getting our adjusted basis in the building because we broke out building versus the land. The depreciable component is the 30 the 39,000. We have to do some kind of calculation like that, which can be a little bit messy on the personal side of things because the personal resonance you might not be tracking as much of the cost of things that you did because you're not getting the benefit of depreciating it at the point in time that it's happening because it's personal side of things. But then when you sell it or convert it, it becomes important because we need to compare this adjusted basis to the fair market value and basically take the lower one. Thank you.