Tax Experts - help please

[WDWorBUST]

We are renting a home to my nephew and niece-in-law. They are paying about half of fair market value and I would say it qualifies as a Not-for-profit rental agreement. In this case....I know I still have to claim what income we do receive from rent from them.....and I can still enter property taxes for this property.....but am I correct in the assumption that if we do not have enough deductions to itemize that we will ultimately pay taxes on that money at our current tax rate and there is no way to lessen that amount? I use turbotax and have searched and searched to have gotten this far....I have entered the rent we have received as other income....and entered what we paid in property taxes and it increases our tax liability by almost $1400 - we made less than $4000 in rent. Can the homeowners insurance we taken off? Or are we just out of luck??

 

[akcire]

We are renting a home to my nephew and niece-in-law. They are paying about half of fair market value and I would say it qualifies as a Not-for-profit rental agreement. In this case....I know I still have to claim what income we do receive from rent from them.....and I can still enter property taxes for this property.....but am I correct in the assumption that if we do not have enough deductions to itemize that we will ultimately pay taxes on that money at our current tax rate and there is no way to lessen that amount? I use turbotax and have searched and searched to have gotten this far....I have entered the rent we have received as other income....and entered what we paid in property taxes and it increases our tax liability by almost $1400 - we made less than $4000 in rent. Can the homeowners insurance we taken off? Or are we just out of luck??

You need an accountant. You can also take depreciation. Yes you can take insurance but I wouldn't carry homeowners. I would carry an owners policy and an umbrella, write off both plus any repairs.

 

[supersnoop]

If you're using TurboTax, you need to use the Premium version to cover this situation. But, since you're rental agreement is not an arms-length transaction, you might want to consult with a professional.

I do know that you cannot deduct expenses beyond the rental income. If you were renting at fair-market-value, you could take a loss against your other income, but not in this situation. You might have to depreciate the house on your taxes, too. In a normal situation, you have to deduct the calculated depreciation from your cost basis whether you claimed it or not. Still, I'm not sure if that will directly offset the rental income, or if you have to item for it to count.

Regardless, you are correct that you'll pay taxes on the rental income at your highest marginal tax rate.

 

[disneymagicgirl]

You need turbotax premier. There is a whole separate tax form it fills out pertaining to the rental property.

 

[Ranger111]

This may help you...or probably not, but take a look:
http://www.rontaxcpa.com/showtip.php?newsid=139

At any rate, I would not do anything until I consulted a certified public accountant or an enrolled agent.

 

[APiratesLifeForMe2]

Let me first say I am not a tax expert, but we just finished our taxes and we too have a rental property that is rented under fair market value (although not by choice, because that's all we can get). Turbo tax should walk you through all the deductions you are eligible for. Make sure to list all expenses and if you have a mortgage, list the mortgage interest as well as property tax info etc. Turbo tax won't even let you get into rental property tax forms without "upgrading". We ended up spending more in expenses than we collected in rent (old house with lots of issues) so we took a loss which helped with taxes.

In the end, if you still have questions, it might be worth working with a tax advisor and paying a little more to file your taxes knowing they were done correctly.

 

[supersnoop]

Let me first say I am not a tax expert, but we just finished our taxes and we too have a rental property that is rented under fair market value (although not by choice, because that's all we can get). Turbo tax should walk you through all the deductions you are eligible for. Make sure to list all expenses and if you have a mortgage, list the mortgage interest as well as property tax info etc. Turbo tax won't even let you get into rental property tax forms without "upgrading". We ended up spending more in expenses than we collected in rent (old house with lots of issues) so we took a loss which helped with taxes. In the end, if you still have questions, it might be worth working with a tax advisor and paying a little more to file your taxes knowing they were done correctly.

You can't actually take a loss if you aren't charging fair market value. But, if that's really all you can get, then it is fair market value.

 

[WDWorBUST]

Thanks everyone....I really hate taxes

 

[DVCcurious]

I am a CPA and here's how it should work.

Open the Schedule E and you can walk right through it.

On the top (line 3) you have your rental income.

Then you have deductions which you can see listed. Most important for you will be 9 Insurance, 12 Mortgage Interest, 16 Property Taxes, and 18 Depreciation. Depreciation is calculated as the rental property's fair market value (excluding land) / 27.5 years.

Now, this is what I'd do. You are allowed to "gift" $14,000 to your Nephew and $14,000 to your Neice each year without having to file a gift tax return with the IRS. Your spouse (if you are married) can also gift $14,000 each. So your couple can gift that couple $56,000 total each year without having to file a gift tax return.

So I would figure out the market rate for the rental property and enter that amount on line 3 (assuming that market rate is less than $60,000 per year). You would then "gift" your nephew and neice the money to pay you fair market rent. So line 3 is the fair market value of the rent, of which you've gifted your relatives some portion above the $4,000 they paid but less than the $56,000 you are allowed to gift. Then you deduct everything you can. Hopefully you will end up with a loss.

This is where it's gets good. Does your family make less than $150,000 per year? If yes then you can take your loss on your rental against your earned income and reduce the taxes you would have been paying. Your neice and nephew get a place to stay and you get to save money on taxes.

It's a beautiful thing.

 

[supersnoop]

I am a CPA and here's how it should work.

Open the Schedule E and you can walk right through it.

On the top (line 3) you have your rental income.

Then you have deductions which you can see listed. Most important for you will be 9 Insurance, 12 Mortgage Interest, 16 Property Taxes, and 18 Depreciation. Depreciation is calculated as the rental property's fair market value (excluding land) / 27.5 years.

Now, this is what I'd do. You are allowed to "gift" $14,000 to your Nephew and $14,000 to your Neice each year without having to file a gift tax return with the IRS. Your spouse (if you are married) can also gift $14,000 each. So your couple can gift that couple $56,000 total each year without having to file a gift tax return.

So I would figure out the market rate for the rental property and enter that amount on line 3 (assuming that market rate is less than $60,000 per year). You would then "gift" your nephew and neice the money to pay you fair market rent. So line 3 is the fair market value of the rent, of which you've gifted your relatives some portion above the $4,000 they paid but less than the $56,000 you are allowed to gift. Then you deduct everything you can. Hopefully you will end up with a loss.

This is where it's gets good. Does your family make less than $150,000 per year? If yes then you can take your loss on your rental against your earned income and reduce the taxes you would have been paying. Your neice and nephew get a place to stay and you get to save money on taxes.

It's a beautiful thing.

This is only good advice if you would post a loss based on the actual rent you're charging. If you're already operating at a loss, but no charging fair-market rent, you can't write it off. But, if you aren't at a loss with your deductions, then adding to the rent and "gifting" them money is going to increase your income more than the loss will offset it. You'll be on the hook for MORE in taxes with this advice in most cases.

 

[Egdisney]

You need turbotax premier. There is a whole separate tax form it fills out pertaining to the rental property.

Use tt premier, it figures depreciation for you, asks all questions pertaining to the rental, mortgage interest is deductible, repairs, management fees, travel to deal with the property,etc.

 

[starry_solo]

I pay the $20 to file the state return (CA) through Turbo Tax. I've done this for 2 years now. Now I see it's free on the State's website...eek!

I will be doing this from now on

Thanks so much Budget Boards!

 

[seashoreCM]

Something to run by your accountant (or do it anyway and ask or let the IRS ask questions later)

If depreciation is disallowed, for example you are renting property at less than fair market value or your activity is a hobby turning a loss, then don't subtract the disallowed portion from basis in order that it not be recaptured if/when you sell the property. Report on the current tax return only the allowed amount of depreciation.

If the depreciation is allowed but you don't have enough income to take advantage of it then that depreciation must still be taken off basis.

The insurance, utilities, property tax, etc. that go with the rental property (or a just proportion if it is an owner occupied multifamily) count as expenses that offset the rent. These items are put on Schedule E and will reduce your taxes even if you use the standard deduction.

Disney hints: http://www.cockam.com/disney.htm