The tax code is full of deductions for landlords. Before you can start taking advantage of these deductions, however, you need a basic understanding of how landlords pay taxes and how tax deductions work. This chapter gives you all the information you need to get started, including:

* how the IRS taxes landlords
* how tax deductions work
* how forms of property ownership affect landlord taxes, and
* IRS audits -- how they work and how to avoid them.

How Landlords Are Taxed

When you own residential rental property, you are required to pay the following taxes:

* income taxes on rental income and profits from property sales
* property taxes, and
* Social Security and Medicare taxes (for some landlords).

Let's look at each type of tax.
Income Taxes on Rental Income

You must pay federal income taxes on the income (rent and other money) you receive from your rental property each year. When you file your yearly tax return, you add your rental income to your other income for the year, such as salary income from a job, interest on savings, and investment income.

This book covers rental property deductions for federal income taxes. However, 43 states also have income taxes. State income tax laws generally track federal tax law, but there are some exceptions. The states without income taxes are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. For details on your state's income tax law, visit your state tax agency's website, or contact your local state tax office. You can find links to all 50 state tax agency websites at www.taxsites.com/state.html. Income Taxes on Profits When You Sell Your Property

When you sell your property, any profit you earn is added to your income for the year and is subject to taxation. Profits from the sale of rental property owned for more than one year are taxed at capital gains rates. These rates are generally lower than income tax rates -- usually 20% lower, except for taxpayers in the lowest tax brackets. (See Chapter 5 for an example of the tax effects of a rental property sale.)

However, you may be able to defer tax on your profits -- perhaps indefinitely -- by selling your property through a like-kind exchange (also called a section 1031 exchange or tax-free exchange). This kind of exchange involves swapping your property for similar property owned by someone else. These property swaps are subject to complex tax rules that are beyond the scope of this book, since they have nothing to do with income tax deductions. For more information, see IRS Publication 544, Sales and Other Disposition of Assets.

Social Security and Medicare Taxes

Everyone who works as an employee or who owns his or her own business must pay Social Security and Medicare taxes. These are two separate taxes:
* a 12.4% social security tax, up to an annual income ceiling or cap -- in 2006, the cap was $94,200 per year, and
* a 2.9% Medicare tax on all employee wages or self-employment profits.

Together, these amount to a 15.3% tax, up to the annual Social Security tax ceiling. Employees pay half of these taxes themselves and their employers pay the other half. Self-employed people must pay it all themselves. Social Security and Medicare Taxes

 

This bestseller is the only book on tax deductions specifically for residential landlords!

1. Tax Deduction Basics for Landlords
2. Landlord Tax Classifications
3. Deducting Your Operating Expenses
4. Repairs
5. Depreciation Basics
6. Maximizing Your Depreciation Deductions
7. Interest
Interest Landlords Can (and Can't) Deduct
Mortgage Interest
Other Interest Expenses
Points and Prepaid Interest
Interest on Construction Loans
Loans With Low or No Interest
Loans on Rental Property Used for Nonrental Purposes
Keeping Track of Borrowed Money

8. Start-Up Expenses
What Are Start-Up Expenses?
Determining Your Business Start Date
Avoiding the Start-Up Rule's Bite
How to Deduct Start-Up Expenses
If Your Business Doesn't Last 15 Years
If Your Business Never Begins

9. The Home Office Deduction
Qualifying for the Home Office Deduction
Calculating the Home Office Deduction
IRS Reporting Requirements
Audit-Proofing Your Home Office Deduction
Deducting an Outside Office

10. Car and Local Transportation Expenses
Deductible Local Transportation Expenses
The Standard Mileage Rate
The Actual Expense Method
Other Local Transportation Expenses
Reporting Transportation Expenses on Your Tax Return

11. Travel Expenses
What Are Travel Expenses?
Deductible Travel Expenses
How Much You Can Deduct
Maximizing Your Travel Deductions

12. Hiring Help
Deducting Payments to Workers
Employees Versus Independent Contractors
Tax Rules When Hiring Independent Contractors
Tax Rules for Employees
Hiring Your Family
Hiring a Resident Manager

13. Casualty and Theft Losses
What Is a Casualty?
Calculating a Casualty Loss Deduction
Disaster Area Losses
Casualty Gains
Tax Reporting and Record Keeping for Casualty Losses

14. Additional Deductions
Dues and Subscriptions
Education Expenses
Gifts
Insurance for Your Rental Activity
Legal and Professional Services
Meals and Entertainment
Taxes
Unpaid Rent

15. Vacation Homes
The Vacation Home Tax Morass
Regular Rental Property
Tax-Free Vacation Home
Vacation Home Used as Rental Property
Vacation Home Used as Residence
Calculating Personal and Rental Use
Converting Your Home to a Rental Property

16. Deducting Rental Losses
What Are Rental Losses?
Overview of the Passive Loss Rules
The $25,000 Offset
The Real Estate Professional Exemption
Rental Activities Not Subject to PAL Real Property Rental Rules
Vacation Homes
Deducting Suspended Passive Losses
Tax Reporting for Passive Rental Losses
Strategies for Dealing With the Passive Loss Rules
At-Risk Rules
How to Deduct Rental Losses

17. Record Keeping and Accounting
Record Keeping Made Simple
Accounting Methods
Tax Years

18. All About Schedule E
Who Must File Schedule E?
Filling Out Schedule E
Schedule E Example

19. Claiming Tax Deductions for Prior Years
Reasons for Amending Your Tax Return
Time Limits for Filing Amended Returns
How to Amend Your Return
How the IRS Processes Refund Claims

20. Help Beyond This Book
Secondary Sources of Tax Information
The Tax Law
Consulting a Tax Professional

Index

"There should be a law requiring every landlord to read this great book. It simplifies the complicated, makes boring tax laws interesting, and offers landlords the major financial incentive of saving tax dollars.... On my scale of one to 10, this outstanding book rates an off-the-chart 12."

 

"This book cannot be recommended too highly.... explains rental property tax deductions clearly and details how to maximize tax benefits by using 'hidden deductions'..."

 

"Uses many lively examples and charts to make potentially boring topics understandable and interesting."

 

"The best of the best.... heavily emphasizes maximizing depreciation deductions."

 

 

Every Landlord's Tax Deduction Guide by Stephen Fishman
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