 Income tax 2021-2022. Rental property special situations part number one. Get ready to get refunds to the max diving into 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 would generally have another schedule basically an income statement with income and expenses expenses basically being deductions the net then is what rolls into line one income here on the income tax formula as well as eventually page one of the form 1040 this is the schedule E in essence the income statement schedule the supplemental income and loss were focused on the rental real estate so we're looking at special situations this chapter discusses some rental real estate activities that are subject to additional rules more rules is that even possible yeah it is we've got we we can do rules forever like infinity rules so we got the condominiums here a condominium is most often a dwelling unit in a multi-unit building but can also take other forms such as a townhouse or garden or apartment if you own a condominium you also own a share of the common elements such as land lobbies elevators and service areas so you could see obviously this kind of form of ownership can lead to differences or in the calculations or some complexity with regards to the taxation of it you and other condominium owners may pay dues or assessments to a special corporative that is organized to take care of the common elements so you you own the common elements the common elements are being taken care of by the organization that you know a joint type of organization to take care of it special rules apply if you rent your condominium to others you can deduct as rental expenses all the expenses discussed in chapter one and two in addition you can deduct any dues or assessments paid for maintenance of the common elements so those common element areas are going to be kind of a different situation for for a condominium kind of situation than a rental we owe the property outside of that situation so you can deduct special assessments you pay to condominium management corporative for improvements however you may be able to recover your share of the cost of any improvement by taking depreciation corporatives if you live in a corporative you don't own your apartment instead a corporation owns the apartment and you are a tenant stockholder in the corporate of housing corporation so you can see again this another form of ownership where you've got this kind of commutal element to it which is going to make the tax calculation a little bit difficult when you're looking at a renting type of situation as compared to if you just owned it outright as like a single dwelling residence for example if you rent your apartment to others you can usually deduct as rental expense all the maintenance fees you pay to the corporative housing corporation well that's nice in addition to the maintenance fees paid to the corporative housing corporation you can deduct your total payment for repairs upkeep and other rental expenses including interest paid on a loan used to buy your stock in the corporative depreciation you will be depreciating your stock in the corporative rather than the apartment itself so now because it's owned with basically the stock now that you're going to be depreciating your ownership interest in what you actually own the corporative in essence and that being a separate entity is the thing that owns the interest so figure your depreciation deduction as follows so how do you do that that seems a little bit more complicated than just depreciating the purchase of the home possibly so figure that depreciation for all the depreciable real property owned by the corporative depreciation methods are discussed in chapter two of this publication and publication 946 we touched on that briefly if you bought your corporative stock after its first offering figure the depreciable basis of this property as follows a multiply your cost per share by the total number of outstanding shares be add the amount figured in a any mortgage debt on the property on the date you bought the stock see subtract from the amount figured in part b any mortgage debt that isn't for the depreciable real property such as part for the land so you got the same kind of issue you know with the depreciation that we're going to be applying the amount that's going to be for land versus the amount for the building the land not being depreciable the building being depreciable number two subtract from the amount figured in part one any depreciation for space owned by the corporative they can be rented but can't be lived in by the tenant stock holder three divide the number of your shares of stock by the total number of shares outstanding including any shares held by the cooperative for multiply the result and two by the percent you figured in three this is the depreciation on the stock your depreciation deduction for the year I can't be more than the part of the adjusted basis defined in chapter two and the stock of the corporative that is allocable to your rental property payments added to capital account payments payments earmarked for a capital asset or improvement so now you've got improvements that are taking place if it was a if it was your own rental property that you owned outright then you've got the question of do I put the improvements on the books you know as an expense or no if it's an improvement I got a categorize it basically as an asset and depreciated well now you've got the cooperative putting the improvements on so you know what you do in that case so otherwise charged to the corporatives capital account for added to the basis of your stock in the corporation so one more time payments earmarked for a capital asset or improvement or otherwise charged to the corporatives capital account are added to the basis of your stock in the corporation for example you can't deduct a payment used to pave a community parking lot instead and install a new roof or pay the principal of the corporate a corporations mortgage treat as capital cost the amounts you were assessing for capital items this can't be more than the amount by which your payments to the corporation exceeded your share of the corporations mortgage interest and real estate taxes your share of interest and taxes is the amount the corporation elected to allocate to you if it reasonably reflects those expenses for your apartment so now you can have to deal with the taxes and you go to the corporate to and say the amount that they're going to allocate you for those items that would generally be you would take deductions on the schedule on your rental property so otherwise figure your share in the following manner so if they don't do that then how are you going to figure it one divide the number of your shares of stock by the total number of shares outstanding including any shares held by the corporation that'll give you your percent kind of ownership your ratio to multiply the corporation's deductible interest by the number you figured in in one so now you've got the interest and you're going to basically try to figure your share of it this is your share of the interest three multiply the corporation's deductible taxes by the number you figured in one so they got the total taxes deducted you're trying to figure your share with the ratio you figured in part one this is your share of the taxes property changed to rental use so now you got a property changing kind of situation that could cause some property problems possibly for example you had it as personal property for example and then you switched it over to rental property which it could be a little bit more difficult to figure what the initial basis of it is for example as opposed to a situation where you bought the property outright that was rental property that you plan on renting because at that point you know what the cost was when you purchased it on a market value because you purchased it on the market so if you change your home or other property or a part of it to rental use at any time other than the beginning of your tax year you must divide yearly expenses such as taxes insurance between rental use and personal use so normally when you change the use of a property would be nice if you could do it basically by the beginning of the year so you have a full year of use of rental property versus personal property but if you don't do that then you've got you've got to deal with this allocation another kind of ratio calculation you would think between the portion of the year which was rental versus personal usage so you can deduct as rental expenses only the part of the expense that is for the part of the year the property was used was used or held for rental purposes so you can't deduct you know rental expenses for the whole year for something that for part of the year was personal purposes and so you have to find some method to be allocating between the personal and the rental fractions of the year you can't deduct depreciation or insurance for the part of the year the property was held for personal use so you can't depreciate a whole year's worth of property if you didn't use it for the whole year so however you can include the home mortgage interest mortgage insurance premiums and real estate taxes for the part of the year the property was held for personal use when figuring amount you can deduct on schedule a so when you're talking about personal property possibly your principal residence for example that then was converted to rental property you often have the capacity to deduct something on the schedule a remember the general rule here for deductions for an income tax in general would be you would think you would only get deductions if you had to expend the money to generate revenue so that the income tax was not placed on gross income but rather net income that seems like the fair thing to do just in general and that's basically what happens on the schedule because it's basically a business so that means that the ordinary necessary kind of expenses those expenses that you needed in order to generate the rental income would be the types of things you would expect to be deductible but on the personal side we've got those added types of things and some of the big added types of things that don't really follow that that general rule or are itemized deductions big ones being the mortgage interest so if you can't if it was your principal residence you might still be able to deduct a mortgage interest if you're itemizing if your itemized deductions are greater than the standard deduction so now you've got this allocation between the portion of the year that was rental versus the portion that was personal still possibly being able to deduct some of that and taxes including property taxes which again it's a little kind of unusual that taxes you know personal taxes are deductible but they're deductible on the schedule a so if you can deduct them on the schedule e when it's rental property and you might be able to deduct them on schedule a when it was personal property if the property was both personal and business at some point throughout the year so example let's take a look at an example shall we your tax year your tax year is the calendar year that's January through December you move from your home in May and started renting it out in June 1st you may deduct as rental expenses 712 of your yearly expenses shed such as taxes and insurance so if we pull out the trusty calculator it's not a difficult ratio calculation to make we got 7 712 still we can deduct the 7 months for rental and there's 12 in the year so that would mean 712 there so that's going to be the 58.33% for example starting with June you can deduct as rental expenses the amount you paid for its it's generally build monthly such as utilities so utilities are not something you can deduct on a schedule a if it was personal but can deduct possibly for the rental half when figuring depreciation treat the property is placed in service on June so so then if you're talking about the personal stuff that you might still be able to deduct on the personal side if you had 712 right if you had 12 months minus the 7 for the months that were the personal use 5 out of 12 then you've got the 41.66 or you can think of it as 7 divided by 12 is the 58 minus 1 is the 41.66 for those expenses that might be able to be deducted either on the schedule a or the schedule e depending on if it be rental property or personal property and those would be like the mortgage interest and possibly the property taxes basis of property changed to rental use when you change property you're held for personal use to rental use for example your rent of your former home of the basis for depreciation will be the lesser of the fair market value or adjusted basis on the date of conversion so this becomes a problem because how do we know what the cost of the property is on a market basis we know that when there's a market exchange when the property is sold if you bought the property you'd have to like people that are on the market that don't have joint interest because we're not related in that events that would also cause problems and they have they have interest that are counter to each other and that's why the prices is usually a valid price in an arms length transaction but if you bought the property 10 years ago then it could have gone up or down in value over that point in time note that what we would like to do on the personal side is is be able to convert the property to rental property with the highest basis we could because the higher the basis the more benefit we're going to be able to get with regards to the the depreciation so so or and or when we sell it we're going to get a benefit now if it's personal property you got to know what the basis is because when you eventually sell it that's when it comes into play because you got the sales price minus the adjusted basis or whatever is going to be the gain or loss which even then might not be a big deal for most people because there's a huge exemption with your principal residents that could wipe out you know the gain in in essence at that point but when you convert it to if it was rental property the basis is going to be quite important because that's going to be one of the big kind of things that you're going to get for the depreciation so the basis for depreciation will be the lesser of which isn't the way we would like it to be going but the lesser of the fair market value of the adjusted basis on the date of the conversion so the lesser of the fair market value or the adjusted basis so fair market value what does that mean this is the price at which the property would change hands between a willing buyer and willing seller how in the world would you ever figure that out because every piece of property is unique where you got to get an possibly get an appraisal or try to estimate it in some way and of course there could be some margin that those estimates can swing you know can swing from one side to the other that's the problem with the real estate and they can swing quite a lot if you're talking about expensive pieces of property in terms of what you're estimating the market value to be could be quite different than if you actually put that unique piece of property on the market to sell it but any case neither having to buy nor sale or both having reasonable knowledge of all the all the facts sales of similar property on or about the same date may be helpful to figure the fair market value of the property so figure the basis the basis for depreciation is the lesser of the fair market value of the property on the date yet you changed it to rental use or your adjusted basis on the date of the change that is your original cost or other basis of the property plus the cost of permanent additions or improvements since you acquired it minus deductions for any casualty or theft losses claimed on earlier years income tax returns and other decreases to basis so meaning if you had the personal property and you made improvements to it that would increase it this is kind of difficult sometimes because sometimes people don't keep as formal records as they should on the personal property because it's not as you're not writing off the depreciation on it each year and you might have a huge exemption so people are kind of doing what they're doing and possibly not tracking it and you're not putting it on tax returns or anything like that so you got to kind of figure that out what you know what the basis of the property is and what improvements you had and so on and so forth so for other increases and decreases to basis you can see adjusted basis in chapter two so example let's do an example that'll help you're you originally built a house for one hundred and forty thousand I built it with my own two hands on a lot that cost fourteen thousand which you used as your home for many years so that's going to be the original price that we had for it and then before changing the property to rental use of this year you added twenty eight thousand of permanent improvements so I built those I built like a whole new the whole new like second floor on it to my own with my hammer so of improvements to the house and you claimed a three thousand five hundred casualty loss deduction for damage to the house part of the improvements qualify for a five hundred dollar residential energy credit which you claim on your prior year tax return because land isn't depreciable you can only deduct the cost of the house when figuring the basis of the land is the dirt you can't depreciate the dirt so only the land because it goes down I mean only the building because it goes down in value so the adjusted basis in the house at the time of the change was one hundred and sixty four thousand that's a hundred and forty thousand that's the original one that I built with my own two hands plus the twenty eight thousand notice we didn't add the fourteen thousand we got the twenty eight thousand that's the improvement that's that second floor that I built with my hammer minus the three thousand five hundred which was the amount that was claimed here and minus the five hundred so on that on the date of the change in use your property had a fair market value of one sixty eight so and that you might have taken an appraisal for example and try to determine the fair market value and it's one sixty eight of which twenty one thousand was for the land and one hundred and forty seven thousand was for the house now notice when you take the appraisal there they're probably not you know you can only see what they're selling for and then you gotta further calculate the ratio then on the land versus the house breaking out the basis for the depreciation on the house is the fair market value on the date of the change one hundred and forty seven thousand because it is less than the adjusted basis of one hundred and sixty four thousand so we have the one forty seven versus the one sixty four we had to take the lesser of the two which is again not what we would like to do I'd like to take the bigger one because then we get more depreciation for it and that would be better but no but no corporatives if you change your corporative apartment to a rental use figure your allowable depreciation as explained earlier depreciation methods are discussed in chapter two of this publication and publication nine four six the basis of all the depreciation real property owned by the corporative housing corporation is the smaller of the following amounts the fair market value of the property on the date you change your apartment to rental use this is considered to be the same as the corporation's adjusted basis minus straight line depreciation unless this value is unrealistic the corporation's adjusted basis in the property on that date don't subtract depreciation when figuring the corporation's adjusted basis if you bought the stock after its first offering the corporation's adjusted basis in the property is the amount figured in one under depreciation under corporates near the beginning of this chapter the fair market value of the property is considered to be the same as the corporation's adjusted basis figured in this way minus straight line depreciation unless the value is unrealistic figuring the depreciation deduction to figure the deduction use the depreciation system in effect when you convert your residents to rental use so now you got to go through the depreciation methods that you're going to be using and at this point in time generally that will be the makers for any conversion after nineteen eighty six we talked about makers a bit in the past treat the property as a place in service on the conversion date example you converted residents see previous example under figuring the basis was available for rent on August first using table two two d c chapter two so we talked about the tables earlier in these in the makers depreciation the percent for your one beginning in august is one point three six four and the depreciation deduction for your one is two thousand five which is one forty seven thousand times point oh one three six four