Investing in Real Estate has been a very effective way for Americans to build wealth. With rising real estate prices combined with low interest rates, it has become even more popular. Today, we’ll cover some of the topics that come up when taxpayers who invest in real estate come to our Dallas, TX office. For today, at a very high level, we’ll discuss the general rules around rental properties including allowable income and expense and taxation. In future blogs, we will cover specific issues in more depth.
As a general rule, you must include in your gross income all amounts received as rent. This would include normal rent payments as well as future rent payments, lease cancellation payments, and portions of security deposits that are kept. We’ll dig into these topics more closely in a future article.
Rental Expenses and Deductions
On the expense side, there are five main categories of deductions:
- Mortgage Interest, Property Taxes and Insurance
- Repairs and maintenance
- Other Operating Expenses
Read our future blogs when we will spend much more time digging into allowable deductions. As a general rule, you can deduct the ordinary and necessary expenses for managing, conserving, and maintaining your rental property. These expenses would include mortgage interest, property taxes, advertising, maintenance, utilities, insurance as well as costs such as your travel costs to maintain your property. Depreciation is often a major deduction that we’ll cover in a future blog.
Reporting Rental income and Expenses
For real estate that is rented personally (not as part of a “C” or “S” Corporation or a Partnership), Income, Expenses, and Depreciation are reported on Schedule E of your tax return. Each property you own will be reported separately and then the results will be combined. There are potentially limits of losses that a taxpayer can deduct based on passive activity loss rules and the at-risk rules. Since these rules can be complex, we'll cover them separately in the future.
Recently, the IRS issued Notice 2019-7 to identify when the Qualified Business Income Deduction (QBI) may be claimed for rental real estate. The QBI Deduction is a deduction of 20% of income on the personal return of taxpayers for qualifying business income. Keep in mind that in general a QBI deduction is beneficial when the investment is generating income and due to depreciation, many real estate investments generate tax losses. This is another topic we’ll take a closer look at down the road.
Do you Need Help?
If you would like help from a firm that specializes in working with realtors and real estate investors, as well as helping those who have IRS problems solve their problems, please give us a call at (972) 821-1991.