 Income tax 2021-2022. Personal use of dwelling unit, including vacation home part number two. 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 Share 2021 IRS website IRS.gov IRS.gov Income tax formula line one income. We would have a sub schedule basically an income statement with income and expenses. Expenses basically being deductions to net then is what rolls into line one income of the income tax formula as well as eventually page one of form 1040. This is the schedule E basically the income statement schedule the supplemental income and loss we're focusing in on the rental real estate. So we're continuing on with our discussion now on the rental property thinking about the division between it being for rental use versus personal use. And we get into the calculations of how we're going to be dividing out the expenses in particular on the income statements were imagining an income statement in essence. And we could divide out the expenses because the expenses are typically for the property for in essence like the year for example or for both business and personal use that we then have to be allocating between business use and the personal use. That's the general concept to do that. We then have to determine how much of the property was used for business versus personal. And now we're getting into some of the details in terms of how to do these calculations quick recap which will require our thinking cap. We're talking about the rental property specifically property that has a business and personal use remembering the general rule for an income tax being that the tax is usually going to be on net income as opposed to the gross income. Therefore the natural types of deductions we would expect would be those that were needed expenses needed deductions needed in order to help us to generate the revenue. So if we have a situation however where we've got a business and personal use then we got to do some kind of allocation method as we see here when we got the property for business or rental use versus the personal use to allocate the expenses out. We're not so focused on the income side of things because income any income we got was of course from the rental use as opposed to the personal use we didn't pay our self income. But the expenses are the items that we might have to allocate between the use of the rental property and the use in the personal side. Some of them may still be deductible on the personal side as well such as mortgage interest and property taxes possibly on a schedule a and other of them as personal items wouldn't be deductible in the personal side but the business use side may be deductible. So then we get into the weeds in terms of what what is going to be the ratio that we are going to be using what counts for rental days what counts for the the personal days and how do we use that calculation to break out between the personal use and rental use our mindset always being from the taxpayer side I would like to allocate more to the rental use because that's the place I'm going to get the benefit from it. Okay so we're continuing on here days used for repairs and maintenance. So what if we're fixing up the place here any day that you spent working substantially full time repairing and maintaining not improving your property isn't counted as a day of personal use. So if we're working on the property and we're trying to improve or we're trying to repair the property notice we have that distinction between whether or not it's going to be categorized as an improvement is it going to be something expense or is it categorized basically as a repair type of item. But the point here being that if we're working on it we're not going to count it as well we're hanging out and the vacation home at that point in time because we're working on the home. So it's not going to be counted as personal use if it were counted as personal use that would usually be a strike against our desires as the taxpayer generally. So don't count such a day as a day of personal use even if the family members use the property for recreation purposes on the same day. I'm over here working on this whole house sweating putting this thing together and the whole family members over there drinking cocktails by the on the deck. But whatever that's okay example Corey owns a cabin in the mountains that he rents for most of the year. He spends a week at the cabin with the family members. Corey 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 sounds nice. Corey's family members however work substantially full time on the cabin each day during the week. I don't know how Corey worked this out so he spends a substantial amount of time fishing hiking and relaxing as he gets the family out there. They were working full time out of the good deal. So 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 Corey and his family won't be considered personal use by Corey. So once again therefore the use of the cabin during the week by Corey and his family won't be considered personal use by Corey. So days used as a main home before or after renting. So now we got that consideration if it's going to be used as the main home. If it's used as the main home you might have limitations in particular with regards to losses. 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 of 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. You can see property changed to rental use in chapter four we talked about before. Example let's take a look at example number one on February 28th 2020 you moved out of the house you had lived in for six years because you accepted a job in another town we're moving up to another town. So you rented your house at a fair rental price from March 15th 2020 to May 14th 2021 that's 14 months on June 1st 2021 you moved back into your old house. The days you used your house as your main home from January 1st of February 28th 2020 and from June 1st to December 31st 2021 aren't counted as days of personal use. So therefore you would use the rules in chapter one when figuring your rental income and expenses because you had that timeframe over the 12 consecutive months. Example number two on January 31st you moved out of the condominium when you had lived for three years it was a good place. Time to move on though you offered it for rent at a fair rental price beginning on February 1st. You were unable to rent it until April it's a fair price what do you mean you don't want the place couldn't rent it till April then someone moved in on September. You sold the condominium so then we sold it so we didn't hold on to it for that 12 months but then we sold it. So the days you used the condominium as your main home from January 1st to January 31st 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 use your rental property as a home. Example number one you converted the basement of your home into an apartment with a bedroom a bathroom and a small kitchen. It's kind of dark down there but otherwise good place we got good lighting we got good lighting it's like those USB lights are as good as the sun because it has like the same kind of vitamin D coming out of it or something. Anyways you rented the basement apartment at a fair rental price to college students during the regular school year college students don't care where they can dig a hole in the ground they're fine. You rented them on 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 brothers stayed with you and lived in the basement apartment rent free your basement apartment was used as a home because you used it for personal purposes for 30 days. A rent free use by your brother is considered personal use. So the fact that the brother was in there and is a relative and used it for the personal use is counting towards the days there which are kind of counting against us in terms of the day. So your personal use 30 days is more than the greater of 14 days or 10% of the total days it was rented which is 27 days. So that's the calculation those two tests we've talked about before. Example number two you rented the guest room in your home at a fair rental price during the local colleges homecoming commencement and football weekends 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 figure 10% of the total days rented to others at a fair rental price is three days. The room was used as a home because you used it for personal purposes for 21 days. That is more than the greater of the 14 days. So you got a rule once again the 14 days greater of 14 days or 10% of the 27 days it was rented. So example number three you own a condominium apartment in a resort area. It's a good place. It's a good place. You rented it at a fair rental price for a total of 170 days during the year. So that's a lot rental price in my condominium place made some good money there. So for 12 of these days the tenant wasn't able to use the apartment and allow you to use it even though you didn't refund any of the rent. That's a good deal. So we rented it. They still paid us but then we used it and they bait us. So your family actually use the apartment for 10 of those days. Therefore the apartment is treated as having having been rented for 160 which is 170 minus 10. So you figure the 10% of the total days rented to others at a fair rental price is 16 days. So your family also use the apartment for seven other days during the year. So you use the apartment as a home because you used it for personal purposes for 17 days. That is more than the greater of the 14 days. So you've got those two kind of tests to allocate whether it's going to be rental, you know, the allocation between rental property and personal property versus the allocation or calculation as to whether it's used for the personal purposes. So you use the apartment as a home if it was used for a home because you used it for personal purposes for 17 days. Okay, minimum rental use. If you use the dwelling unit as a home and you rent it less than 15 days during the year that period isn't treated as rental activity. So now you're under the 15 days not rental activities. See used as home but rented less than 15 days later for more information. I limit on deductions. So renting a dwelling unit that is considered a home. So now we we've discussed this limitation or kind of problem. If it's considered a home, then we might have limitations. So that's kind of bad for taxes. Okay, we don't really want to list our rental property as a home or vacation property or whatever, because then we might be subject for example to passive activity laws that could limit the losses that we would like to take on it. So renting a dwelling, renting a dwelling unit that is considered a home is isn't a passive activity. Instead, if your rental expenses are more than your rental income, some or all of the Essex 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. So we got, you know, more severe limitations with regards to the losses. We can't take them against other stuff. So then the question is, well, what do I do? Can I at least take it against other other income possibly in the future rolling it forward? Yeah, but you're severely limited there too as well. So if you had income in the next year, then possibly you could do that. So any expenses carried forward to the next year will be subject to any limits that apply for that year. The limitation will apply to expenses carried forward to another year, even if you didn't use the property as your home for that subsequent year to figure your deductible rental expenses for this year and any carry forward next year. You can use worksheet five dash one. So you can find that in the publication. So reporting income and deduction property not used for personal purposes. If you didn't use the dwelling unit for personal purposes, you can take a look at chapter three. We looked at in the past on how to report rental income and expenses property used for personal purposes, which is our focus at this point in time. 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 not used as a home. If you use a dwelling unit for personal purposes, but not as a home report all of the rental income in your income. Because you use the dwelling unit for personal purposes, you must divide your expenses between the rental, the rental use and the personal use as described earlier in this chapter under dividing expenses. So of course we got that situation. The income is all income because it came from the rental portion. We didn't pay ourselves income, but the expenses we got that issue with the allocation between personal and rental. We would like to take the expenses as deductions and therefore allocate them towards the rental. The expenses for personal use aren't deductible as rental expenses. Your deductible rental expenses can be more than your gross rental income. However, see limits on rental losses in chapter three. I used a home but rented less than 15 days. So now you rented it under that 15 days. If you used 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 it shouldn't be reported on schedule E. So now you can't report it on schedule E because you're under 15 days of the rental. You aren't required to report the rental income and rental expenses from this activity. 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 if you can't report it as the rental income on the schedule E, then you default back on over and say, well, can I still report some of this stuff as basically personal items because it's a home on the schedule A. But then you got the same kind of limitations with regards to do you have itemized deductions over the standard deduction and so on and so forth. So see the instructions for schedule A for more information on deducting these expenses. So used a home and rented 15 days or more. So now you used it as a home and you rented it for more than 15 days. So if you used a dwelling unit as a home and rent it 15 days or more during the year, include all your rental income in your income. So then now now the income is going to be included because you use the dwelling unit for personal purposes. You must divide your expenses between the rental use and the personal use as described earlier in this chapter under dwelling expenses. So we got to do that allocation method as would be expected. The expenses for personal use aren't deductible as rental income. So the personal use stuff not going to be deductible on schedule E. For example, if you had a net profit from renting the dwelling unit for the year. That is if your rental income is more than the total of your rental expenses, including depreciation deduct all of your rental expenses. So if you got income after allocating the proper expenses on the on the rental side, great. The iris will just takes part of it as per our usual arrangement. But however, if you had net loss from renting the dwelling unit for the year, your deduction for certain rental expenses is limited. Because we don't the iris is like we don't like those losses. Remember, we don't like that stuff because you might we don't want to take on the risk of loss. So to figure your deductible rental expenses and any carryover next year, you can use the worksheet five dash one. So and I won't dive into that worksheet at this point.