 Income Tax 2021-2022 Software Example, Rental Property, Special Situations. Get ready to get refunds to the max, diving into Income Tax 2021-2022. Well, sir, 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, irs.gov, irs.gov. Starting point, we got the single file or Adam Smith living in Beverly Hills 90210. We've got the W-2 income at the 100,000, the standard deduction 12,050 to get to the taxable income 87,450, page two calculating the tax then at the 15,015. Back to page one, we're going to first think about having the real estate as a principal residence, look at the benefits and the deductibility components, then converting it to rental property, possibly partially rental property or renting part of our home or possibly then moving and renting the home maybe for a fraction of that first year. So first off, if we have a principal residence, note that this is the more unusual situation where you might be able to deduct some things for the federal income taxes that is more unusual because usually when you think about income taxes, the things that you would expect to be deductible are those things you needed to extend in order to generate revenue. Personal items you would think not being deductible. The principal home being that major exception where you might be able to deduct then the interest and the property taxes are the two things that first basically come to mind with it but you'd only get a benefit from it if it was greater than the standard deduction. So if you're moving from a renting situation to a home bond, you really got to take that into consideration because the tax benefit would only be the benefit over and above what you're already getting with the standard deduction. So let's say that we had the rental or that we had our home that we were deducting on the good old Schedule A, the Schedule A. So I'm going to say it was $17,000 for the interest, $6,000 for the property taxes going on over to the Schedule A. You can see here on line 12, we've bumped up from the standard deduction to the itemized deductions which you can see on the Schedule A now. So now we've got the Schedule A calculating the mortgage interest and then we've got the property taxes and then we've also got like the state taxes which are kicking us over the threshold at the $23,879 that's pulling over to page one of the Form 1040. So usually the principal residence is given as a benefit in that instance. Now notice what we're not taking here. If we purchased the home, we're not taking like the value of the home. I'm not depreciating the home. So I'm not really tracking like the adjusted basis of the home although I still would want to do that because when I sell the home that will be coming into play. But it's not like it's something that I'm depreciating over time. So that's something that we don't get as a deduction if it was our personal or principal residence. Now let's say we rent it out like part of our place, part of our principal residence. Let's say we've rented out like 10% of it. Well that would mean then now part of it has become basically rental property and we would then have basically the Schedule E. Now I have a different address but we're going to say imagine this is our same address that we're using here and let's say we've rented out like 10% of our place. Now the income up top whatever we charge for the income will be what it is. I don't need to allocate the income between personal and non-personal because any income I got was on the rental portion. So I don't need to do any kind of allocation method there. But, and so advertising for example would clearly be something directly on the rental property in order to rent the property and so on. So I don't need to do an allocation method for something like that that was spent directly for the rental property. But when we're talking about the things such as the interest here, now I'd have to be allocating the interest between the two. And what did I say the interest was like 17,000. So if I pull out my trustee let's say the I think I said let's do it on the Excel. Interest total we said was let's say the total interest was the 17,000 and then we said let's say we used a square foot method for example to figure the property for the rental. So the rental property let's say was you know 1,000 versus total square feet was 10,000. So then we got a ratio that we would have here and that ratio is what we're going to basically be using to allocate those items that we need to allocate using the ratio. So the interest then we would say would be broken out between rental and personal. So the rental would be this times the 10% and then the personal would be this minus that or you can calculate it as this times the 90%. So we're breaking it out 10, you know 1090. So that would be the interest would be 1,700 let's say. So it's I'd have to say okay this is now 1,700 on the interest and then I can go back to the schedule a and I'd have to say okay I reported on the schedule a 17 let's subtract out 1,700 so that when I actually look at my forms between the two of them I'm still going to get a benefit on the schedule a but now it's the 15 three the 15 three plus what I took on the schedule e now which I can't see yet because I hit it. I hid the schedule e what did I put it. I put this little one there hit it. So I'm going to go back on over now on the schedule e I've got the 1,007 so I still might get a benefit from that one for the personal side and the rental side but you can imagine situations where it might be better on the rental versus the personal depending you know on if you're limited on the standard deductions or if you have a loss for example on the rental property for the for the taxes you would you would do a similar thing you would think for the state tax state taxes let's say we said the total was 6,000 I think so then you would think then the amount that was rental would be 10% of that and the amount that would be personal would be this minus this or 90% so I'd go back on over here and Sarah taxes then I got taxes that I got to deal with so real estate for the rental we said was was 600 600 and you might even you know put like you might say this is the amount for the 1098 for the 1098 per 1098 and put the full amount here which was the 6000 minus the personal personal part or 90% or you might like say 90% rental for example and that would give you the minus the 6 minus the 5,400 and that will give you the rental component of the 600 so you can kind of see it in the detail when you kind of review your tax return and then you go to the schedule a and you might do something similar you might say okay the taxes I had here was the 6 but then I'm going to take out the rental rental component which was 10% which you might mark in there of 600 600 that leaves us with the 5,400 where we have here so then if I pulled that on over to the forms you've got the 600 here and you might still get the benefit from the schedule a and the net of the two of them is something that that might tie out will should tie out to your total wherever you're getting the property tax calculation from your property tax bills for example now then the other thing you got to think about is the actual building and the land which you didn't have to basically depreciate before and that's when you got to think about okay I've got to use the lesser of basically my adjusted basis that I purchased it for or the fair market value and then figure out the portion of that that is allocated to the rental so let's say let's say I figured out that the total amount was the building 264 706 and then the land was the 35 294 for example if that was for the whole property then I got to say well now I'm going to allocate 10% of that would be the general idea to the to the rental so I'm going to say basically 10% is rental and so if I go back on over then you're going to have your depreciation schedules say on the building we talked about the depreciation methods that would be used for real estate and prior presentation so just quick example here we're going to say we acquired it we put it in as a rental on the 1121 the cost is the 264 706 but we're going to say that the portion that we're going to be depreciating at this point is going to be the 10 and so that's going to give us our depreciation basis at the 264 71 it's going to be straight line mid month convention we took the 27.5 so then we got our calculation of the depreciation now other types of stuff if we put it if we put it in place and it was used specifically for the rental like we use furniture for the rental property then then we might have the full amount depreciated for for those items that we applied directly to the rental for example and that would then pull in to the schedule e here so that would be the add so you know added items that we might say so we might have a couple items on the schedule e that that we would have to allocate between the schedule a and the schedule e and some items might be allocated directly to the schedule e and if we had any kind of depreciation of course would also have to be allocated to the schedule e we won't we don't get anything on the schedule a for it and then if we had repairs or things like that to the home in general we might use our same 10% kind of allocation method if we had repairs or something like that specifically to the rental 10% then you would think you'd get the full amount of the 10% for the rental activity in that instance now let's try to mirror this little example they put us together here on on January our taxpayer bought a condominium apartment to live in instead of selling the house we had living in she decided to change it to rental property so now she's moving and she's going to take her old home and not sell it but rented she selected a tenant and started renting the house on February 1st she charged 750 a month so she started in the middle of the year so now you've got the situation where she started she's got 11 month went rental one month of a an itemized deduction she also received 750 security deposit for the tenant so a security deposit that she has to pay back unless something happens therefore we're not going to include that in income so her rental expenses for the year are as follows so she has the mortgage interest the fire insurance the miscellaneous repairs and the real estate taxes so then she must divide the real estate taxes mortgage interest and fire insurance between the personal use of the property and deduct she can deduct 1112 of these expenses so she had to basically break out these expenses and only deduct 1112 of the amount that's going to be allocated between them real estate taxes and the mortgage interest fire insurance she can deduct the balance of the real estate taxes and mortgage interest when figuring the amount she can deduct on schedule A if she itemizes she can't deduct the balance of the fire insurance because it is a personal expense so she bought this house in 1987 for 37,000 her property taxes was based on the assessment of 10,000 for the land and 25,000 for the house before changing it to rental property she added several improvements to the house she figures her adjusted basis as follows so on February 1st when she changed her house to rental property the property had a fair market value of 152,000 of this amount 35,000 was for land and 117 was for the house because she adjusted basis is less than the fair market value on the date of the change she uses the 39,000 so in other words she can't step up the basis in her property when she converted to rental she has to use the lower value because you know it would be a tax benefit to kind of step it up so as specified for rental property she must use the straight line method so we're going to use the 25.5 27.5 years depreciation method she uses the table to figure out the depreciation so basically her income statement comes out to this so we're going to kind of mirror this her total rental income was 750 times 11 we don't have to do any allocation there because it's basically straight forward she's got her expenses which are the mortgage interest which we might get a 10.98 for but we would have to take 11.12 applying it to schedule A and then schedule E the fire insurance we have to take 11.12 and apply it to schedule E but we can't apply it to schedule A because it's personal and then we got the miscellaneous repairs that we apply specifically to schedule E the real estate taxes which we're going to allocate between schedule E 7 months to schedule E and then the total expenses so let's try to figure that part out so if I was to input this into the schedule E we'd say okay they got income of 8.250 that we had I'm going to remove the advertising we have the mortgage interest which she allocated 750 so if I look at my worksheet on the interest she had 750 and now we're not looking at square footage we're looking at rent months versus total months which is 11 over 12 so 11.12 so now my rental component is going to be 11.12 which comes out to that the rental part of so hold on a second the interest the mortgage interest is 18.00 so that's going to be broken out the 1650 versus personal and the state taxes she said was 1200 which we're going to be breaking out thusly 11 months for the rental and the personal for the one month so that's where we're getting then if I go here for the interest we're getting the 1650 for the 11 months and then we go to the schedule A where the schedule A we're probably not going to be itemizing at this point because it's going to be too low but on the personal side for the interest we're going to have the 150 so I'll just do the 150 and the two of those adding up to the total that might be on the 1098 and then we've got the fire insurance would be on this on the schedule E for the portion that we can take so I'm going to deduct this and I've got insurance I'll just put it here that's going to be the insurance of 92 and then we've got the miscellaneous repairs so I'm going to put that under which was 297 which I don't have to allocate in any special way the real estate taxes then the real estate taxes I'm going to say are we're allocating here we said was the 1100 and the amount on the schedule A for the real estate taxes if I was to get a benefit from them we said for the one month or just the 100 now the 100 so there we have that for the real estate taxes so if I go back on over so we got the insurance the mortgage interest the repairs and the taxes and that brings this up to the 313 39 and then we've got the depreciation so the house we said was 39000 so we'll just deal with that because that's the depreciable portion so I'm going to say right now the home if I go to depreciation was cost 39000 but I'm going to say we put it in place on February 1st and it's going to use that mid month convention calculation so we'll use the makers 27.5 years and that'll calculate it out for the depreciation at the 1241 which we could see on our depreciation schedule here so it's the 39 on February straight line mid month convention 27.5 years we're using the rate from the tables of the .0182 which you could see they basically show here in the example and then we're going to say okay well they bought a dishwasher so if we put the dishwasher on here so I'm going to say we got a dishwasher dishwasher dishwasher dishwasher I don't think I spilled it so then she bought a dishwasher at 125 now we're not going to deal with special depreciation here we're just going to use the double declining method and this is half year and so there's the .2 so it was five year property and there's the 85 and then the furnace which were at the 4000 which we're using the 27.5 and basically I may not have used the same dates here but we're basically using a mid year convention for this item and this one up top we would be using a mid month convention but those then pulling in to the schedule E so that's going to give us our items here and we get down then to the net of the 3694 which basically ties out you know to our example problems the 3694 that we saw that we were working through in the prior presentation so that amount the 3694 pulling in to the schedule pulling in to the form 1040 note that we're not itemizing at this point because we only had one month of those expenditures for the mortgage interest and the real estate taxes which if that's all we had if it was that alone wouldn't be enough to push us over although we might have you know 11 months of mortgage interest and taxes for example of our new home as we rented out the prior home in which case those could be items that could basically benefit us in that calculation so those are the two kind of examples where you'd have to kind of do a ratio type of thing for example if you're renting out a portion of your principal residence then you've got that kind of complication between the personal and the rental and if you rent out then your personal residence and you move somewhere else for a fraction of the year that first year fraction is complex and you've got that interplay between the schedule A deductible items versus the rental basically deductible items that you've got to do some allocation and you've got to take into consideration what's going to be the basis of the property at the point in time that you convert it from the personal to the rental use so that you can start to think about the depreciation method where you've got to look at the lesser of the fair market value versus the adjusted cost of the property for example