 Income tax 2022-2023, rental property, personal use, dwelling used as a home and reporting income and deductions. Let's do some wealth preservation with some tax preparation. 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. 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. Looking at the income tax formula, we're focused on line one income. Remember on the first half of the income tax formula is in essence an income statement, but just an outline, other forms and schedules flowing into these line items. For example, the Schedule E in essence an income statement in and of itself with rental income minus rental expenses, the net rental income in essence rolling into line one income of the income tax formula. We're now continuing on with these more complex type of situations where there might be a personal use component with the rental property, remembering that with rental property as with business kind of activities, we'd like to keep it separate from the personal activities that helps us to do the bookkeeping, helps us to do planning, budgeting into the future, and helps us of course with the tax preparation. But sometimes we have to some co-mingling kind of situations happen, in which case most of the rules that we talked about in prior presentations when we focused on just a piece of property that's used for rental exclusively will still apply, but now we have to separate out, parse out the business and personal oftentimes when we have these types of situations and that's what we're continuing on with here. So what is a day of personal use? So a day of personal use of a dwelling unit is any day that the unit is used by any of the following persons. So we talked about in prior presentations breaking out the days that are for personal use so we can do some of these calculations in terms of whether it is qualified as a home and then of course we need to be breaking out the expenses between personal and business. Okay, number one, you or any other person who owns an interest in it unless you rent it to another owner as your main home under a share equity financing agreement defined later, however, see days used as a main home before or after renting later. Number two, a member of your family or a member of the family of any other person who owns an interest in it unless the family member uses dwelling unit as their main home and pays a fair rental price. So obviously when we're thinking about personal use if we personally use the property that's pretty straightforward. But if we have some family member or someone like that that's using the property if they're paying the fair price then you would think okay now it's still like a business transaction that gets messy because then we have to think about what the fair price is and so on and so forth because it's not an arms lengths transaction because they're a relative and if they're not paying the fair price then you're thinking it could be counting towards the personal use day at that point. So family includes only your spouse sibling, half sibling, ancestors, parents, grandparents, etc. and lineal descendants, children, grandchildren, etc. Number three, anyone under an arrangement that lets you use some other dwelling unit and number four, anyone at less than a fair rental price and number four is kind of a catch-all for all of these items because obviously you would think that the telltale indicator that it's for personal use as opposed to a rental type of situation is that you're not getting the fair price, right? So if you rent it to a family member then they might have a lesser price and you wouldn't have the fair price. So that's some of those could be somewhat redundant and you might be able to distill it down to an essence. Number four, at least being the major indicating factor that something funny is going on. Main home. So if the other person or member of the family in one or two has more than one home, their main home is ordinarily the one they lived in most of the time. So now we have a situation of needing to figure the main home type of situation. What does that mean if you're living in multiple places? Well, we're going to say it's the one you lived in most of the time. So shared equity financing agreement. So this is an agreement under which two or more persons acquire undivided interest for more than 50 years in an entire dwelling unit, including the land and one or more of the co-owners is entitled to occupy the unit as their main home upon payment of rent to the other co-owners. All right, donation of use of the property. You use a dwelling unit for personal purposes if you donate the use of the unit to a charitable organization. So now you're not renting it out. You're donating it to a charitable organization. The organization sells the use of the unit at a fundraising event and the purchaser uses the unit. So examples, the following examples show how to determine if you have days of personal use. Example number one, you and your neighbor or co-owners of a condominium at the beach. Last year, you rented the unit to vacationers whenever possible. The unit wasn't used as a main home by anyone. So you've got this vacation type of home and it's not anyone's principal residence because everyone that's basically lived in it or used it has some other place basically that is their principal residence because they've lived there longer for that year than this place. All right, your neighborhood used the unit for two weeks last year. Your neighbor used the unit for two weeks last year. You didn't use it at all because your neighbor has an interest in the unit. Both of you are considered to have used the unit for personal purposes during those two weeks because of course the neighbor is a co-owner. So example two, you and your neighbor are co-owners of a house under a shared equity financing arrangement. Your neighbors live in the house and pay you a fair rental price. Even though your neighbors have an interest in the house, the days your neighbors live there aren't counted as days of personal use by you. This is because your neighbors rent the house as their main home under a shared equity financing arrangement. Example three, you own rental property that you rent to your son. So now we've got this relationship kind of weird situation which is common but obviously throws a wrench into things. Your son doesn't own any interest in this property. He uses it as his main home and pays you a fair rental price. Your son's use of the property isn't personal use by you because your son is using it as his main home. He owns no interest in the property and he's paying you a fair rental price. So when we're dealing with family situations, a father-son type of situation, this is where it gets kind of messy because you have to determine these types of things. So obviously if we think about this again, you've got the son living there. So he's using it as his main home. He owns no interest in the property so the son doesn't own the property so it looks like a legitimate rental situation from that perspective. And then of course the key one here, he is paying you a fair rental price. What does a fair rental price mean? Well, it's tough to determine because all rental property is unique but you can think that you can have a fair rental price by appraising it, comparing it to other similar type rentals. Example four, you rent your beach house to Rosa. Rosa rents her cabin in the mountains to you. So now you're saying, hey Rosa, I got a beach house and Rosa's like, I've got a cabin and we can kind of swap the rental usages, right? So you each pay a fair rental price. You are using your beach house for personal purposes on the days that Rosa uses it because your house is used by Rosa under an arrangement that allows you to use her cabin. Example five, you rent an apartment to your mother at less than a fair rental price. And now you've got this whole family member thing here again. You're like, come on mom, you got to pay me the fair market price here. But no, she's not going to, she's less than the fair market price. So you are using the apartment, you are using the apartment for personal purposes on the days that your mother rents it because you rent it for less than a fair rental price. So days used for repairs and maintenance. So any day that you spend working substantially full time repairing and maintaining, not improving, your property isn't counted as a day of personal use. So if you're putting time into the property to repair it, you're not really personally using it. You're trying to fix it. So it's not going to be included for personal use, which is not. So don't count such a day as a day of personal use, even if family members use the property for recreational purposes on the same day. So even if your family members are hanging out, having some drinks or whatever, but you're sitting there working on the house. Example, Cory owns a cabin in the mountains that he rents for most of the year. He spends a week at the cabin with family members. Cory works on maintenance of the cabin three or four hours each day during the week and spends the rest of the time fishing, hiking and relaxing. Cory's family members, however, work substantially full time on the cabin each day during the week. The main purpose of being at the cabin that week is to do maintenance work. Therefore, the use of the cabin during the week by Cory and his family won't be considered personal use by Cory. Okay. Days used as a main home before or after renting. So for purposes of determining whether a dwelling unit was used as a home, you may not have to count days you use the property as your main home before or after renting it or offering it for rent as days of personal use. Don't count them as days for personal use if you rented or tried to rent the property for 12 or more consecutive months or you rented or tried to rent the property for a period of less than 12 consecutive months and the period ended because you sold or exchanged the property. However, this special rule doesn't apply when dividing expenses between rental and personal use. So you've got these different components when you're trying to calculate whether it's a home use and then the calculations for dividing between personal and rental use calculations. All right. Example one, on February 28, 2021, you moved out of the house you had lived in for six years because you accepted a job in another town. You rented your house at a fair rental price from March 15, 2021 to May 14, 2022, 14 months. On June 1, 2022, you moved back into your old house. The days you used the house as your main home from January 1 to February 28, 2021 and from June 1 to December 31, 2022 aren't counted as days of personal use. Therefore, you would use the rules in chapter one when figuring your rental income and expenses. Example two, on January 31, you moved out of the condominium where you had lived for three years. You offered it for rent at a fair rental price beginning on February. You were unable to rent it until April on September 15. You sold the condominium. The days you used the condominium as your main home from January 1 to January 31 aren't counted as days of personal use when determining whether you used it as a home. Examples. The following examples show how to determine whether you used your rental property as a home. Example one, you converted the basement of your home into an apartment with a bedroom, a bathroom, and a small kitchen. You rented the basement apartment at a fair rental price to college students during the regular school year. You rented to them a nine month lease, 273 days. You figured 10% of the total days rented to others at a fair rental price is 27 days. During June 30 days, your brother stayed with you and lived in the basement apartment rent free. So now we have this relationship situation again. Your basement apartment was used as a home because you used it for personal purposes for 30 days. Rent free use by your brothers in considering personal use. So the personal use by the brother would be considered as part of that. So your personal use 30 days is more than the greater of 14 days or 10% of the total days it was rented 27 days. Example two, you rented the guest bedroom in your home at a fair rental price during the local colleges, homecoming, commencement, and football weekend, a total of 27 days. Your sister-in-law stayed in the room rent free for the last three weeks, 21 days in July. You figured 10% of the total days rented to others at a fair rental price is three days. So the room was used as a home because you used it for personal purposes for 21 days. That is more than the greater of 14 days or 10% of the 27 days it was rented three days. Example three, you own a condominium apartment in a resort area. You rented it at a fair rental price for a total of 170 days during the year for 12 of these days, the tenant wasn't able to use the apartment and allowed you to use it even though you didn't refund any of the rent. Your family actually used the apartment for 10 of those days. Therefore, the apartment as treated as having been rented for 160, which is the 170 minus the 10 days, you figured 10% of the total days rented to others at a fair rental price is 16 days. Your family also used the apartment for seven other days during the year. You used the apartment as a home because you used it for personal purposes for 17 days. That is more than the greater of 14 days or 10% of the 160 days it was rented 16 days. The minimal rental use. If you use the dwelling unit as a home and you rent it less than 15 days during the year, the period isn't treated as a rental activity. So now you've got your home and you're saying I rented but less than 15 days. Well, then the IRS is going to say, well, maybe that's going to be immaterial. Again, the IRS might be doing that in part because if you only rented it for 15 days, the rental income might be fairly small and you might have more expenses than income in that situation. So you could see used as a home but rented less than 50 days later for more information. Limit on deductions. Renting a dwelling unit that is considered a home isn't passive activity. Instead, if your rental expenses are more than your rental income, some or all of the expenses can't be used to offset income from other sources. So once again, renting a dwelling unit that is considered a home isn't a passive activity. Instead, if your rental expenses are more than your rental income, so that means you're at a loss situation again, which is really where everything gets messy with the IRS because they want your income, they don't want to pay you for losses. Some or all of the excess expenses can't be used to offset income from other sources. The excess expenses that can't be used to offset income from other sources are carried forward to the next year and treated as rental expenses for the same property. Any expenses carried forward to the next year will be subject to any limits that apply for that year. So you have this similar kind of activity that we saw with the losses where they're going to say, we're going to restrict the losses and you might be able to take them in the future, but we're going to restrict them to, in this case, the same activity. So this limit will apply to expenses carried forward to another year even if you don't use the property as your home for that subsequent year. So if you convert the property and aren't using it as your home, do you just lose the expenses? Well, no, you would think it would be reasonable to still be able to take the expenses for the same property in the second year even if it's not your principal home in that time. So to figure your deductible rental expenses for this year and any carryover to the next year, you can use worksheet 5-1 and you can check that out in the publication. Reporting income and deductions. Property not used for personal purposes. If you don't use a dwelling unit for personal purposes, see chapter 3 for how to report your rental income and expenses. Property used for personal purposes. If you do use a dwelling unit for personal purposes, then how you report your rental income and expenses depends on whether you use the dwelling unit as a home. So that's where this calculations come in. That's why we have to be breaking this out of whether it's used as a home with all these examples we've been taking a look at. So not used as a home. What if it's not used as a home? If you use a dwelling unit for personal purposes but not as a home, report all the rental income in your home. Because you use the dwelling unit for personal purposes, you must divide your expenses between the rental use and personal use as described earlier in this chapter under dividing expenses. Obviously the income side of things is you don't have to divide that out because it's only going to be rental income, you're not going to have personal income. The expenses you're going to have to divide out using what we talked about in a prior presentation for dividing expenses. So the expenses for personal use aren't deductible as rental expenses, although you might be able to deduct them on like a schedule A or something. You know, you could take a look at that but we're focused here on the rental side of things. So personal stuff typically not deductible, rental stuff possibly deductible on the schedule E. Your deductible rental expenses can be more than your gross rental income. However, see limits on rental losses in chapter three. So we have the same kind of situation now you have the rental property. If you're into the loss situations then you've got the possible limitations that we covered in chapter three. If you want to take a look at the publications which we looked at in prior presentations. Used as a home but rented less than 15 days. If you use a dwelling unit as a home and you rent it less than 15 days during the year, its primary function isn't considered to be rental and shouldn't be reported on schedule E. So now we're under that 15 day threshold, we're not going to be using the schedule E. You aren't required to report. Report. Rental income and rental expenses from the activity. So you might think well the IRS has given you a break on this. But they're probably again they're probably saying the IRS is probably thinking well if you rented it less than 15 days you got rental income. But you probably have expenses that are equal to or greater than that because the rental income is going to be fairly small. So that's why they might be saying we're not going to bother with that. So any expenses related to the home such as mortgage interest property taxes and any qualified casualty loss. Will be reported as normally allowed on schedule A. So now if it's your principal home and you're under that threshold you'd say well I can't deduct it on the schedule E because it's under that 15 day. So therefore I'm going to just see if I can take it on schedule A as itemized deductions if my itemized deductions are greater than the standard deduction. And so see instructions for the schedule A for more information on deducting these expenses. I used a home and rented 15 days or more. So now you have it used as a home and you rented for more than that de minimis amount that small amount the 15 days. So if you use a dwelling unit as a home and rented it 15 days or more during the year include all your rental income in your income because you used a dwelling unit for personal purposes. Our purpose. You must divide your expenses between rental use and the personal use as described earlier in this chapter under dividing expenses. The expenses for personal use aren't deductible as rental expenses. If you had a net profit from the renting the dwelling unit for the year it is your rental income is more than the total expenses including depreciation deduct all your rental expenses. So obviously if you have an income situation the Irish is like OK great give us part of it. So so you don't need to use worksheet five one. However if you had a net loss from renting the dwelling here's where here's where the problem happens the losses that's where the Irish is gets upset dwelling during the year. Your deduction for certain rental expenses is limited to figure your deductible rental expenses and any carryover to next year you could use worksheet five one. You could see that in the publication.