First time landlord tax woes

[edro]

Last year was the first full year we rented our old house out.

I am doing some prelim tax return numbers when....Awww crap.
It dawned on me that we owe tax on all of the rental income.

We can deduct interest, insurance, taxes, repairs, mileage, etc.
Even with all that, we made a hefty profit and have to pay standard income tax on it.

It sucks usually getting a tax refund and now we probably owe quite a bit.
Next year we will hold back some of the profit to pay the tax bill.

</firstworldproblem>

Landlords, feel free to chime in with more deductions or tips.
Thanks!

 

[Genx87]

Depreciate the property at a rate so as to erase your profit.

 

[highland145]

Depreciate the property at a rate so as to erase your profit.

Used to be 27.5 years on rentals. Sold all of mine, happily.

Not that I'd suggest anything underhanded but..........I've heard of people doing reno's on their own houses/appliances/etc and claiming them on the rentals.

 

[DrPizza]

Have you purchased any tools to use to repair the rental? I used to frequently find myself 25 miles from home & needing a particular tool. It was quicker and more cost/timeeffective to purchase a new tool at a local hardware store vs. traveling back home, and back to the rental house.

 

[highland145]

Have you purchased any tools to use to repair the rental? I used to frequently find myself 25 miles from home & needing a particular tool. It was quicker and more cost/timeeffective to purchase a new tool at a local hardware store vs. traveling back home, and back to the rental house.

Mileage is deductible.

 

[GoodRevrnd]

Mileage is deductible.

Ya but that hour of time he loses is not.

 

[highland145]

Ya but that hour of time he loses is not.

True. I hated to see the renters name on the caller ID. In the end, wasn't worth the stress.

 

[HardcoreRobot]

Used to be 27.5 years on rentals. Sold all of mine, happily.

Not that I'd suggest anything underhanded but..........I've heard of people doing reno's on their own houses/appliances/etc and claiming them on the rentals.

if you are going to commit fraud why not just not claim the rental income?

 

[highland145]

if you are going to commit fraud why not just not claim the rental income?

True but if you get audited you better be able to explain how that regular monthly $$ ended up in your checking account.

 

[Blieb]

we made a hefty profit and have to pay standard income tax on it.

awww pobrecito!

 

[Texashiker]

It sucks usually getting a tax refund and now we probably owe quite a bit.
Next year we will hold back some of the profit to pay the tax bill.

Welcome to the real world.

Sounds like you need more deductions. Get a magnetic sign for your truck/car, record your mileage, the deduct what you can in tires, gas and maintenance.

 

[alent1234]

go get a CPA

turbotax is like $80 plus filing plus state plus the audit protection and other services. CPA is the same price

 

[alkemyst]

Keep in mind while many of the suggestions work, almost anything can work when you file.

It's the future audit and then the future audits that triggers that makes it painful.

Penalties start from the day you didn't pay.

In general, you should be able to deduct travel/mileage, tools, internet, supplies, etc all that were needed for your rental. The IRS knows what's typical.

In the end, it sounds like you owe. I have been there on a huge 1099 year. The IRS has favorable terms if you approach them first. I can't remember what the rates were, but it wasn't bad and I had a 6 month payment plan (I paid off in 3)...

 

[sactoking]

If you just now realized you owe tax on a hefty amount of income for 2011 proceed with caution as not only do you not want to trigger an audit you may also owe penalty and interest on a grossly underpaid tax balance.

 

[brandonb]

I have my renter pay the mortgage company directly so it does not pass through me, and therefore, I do not pay taxes on it. But if you have the mortgage paid off, then thats another issue.

 

[sactoking]

I have my renter pay the mortgage company directly so it does not pass through me, and therefore, I do not pay taxes on it. But if you have the mortgage paid off, then thats another issue.

You own a property with a loan and mortgage, it is rented to a third party, and the third party pays the note on your behalf? That, good sir, is constructive receipt of income and subject to tax. If you get audited you'll be in a world of hurt.

 

[highland145]

You own a property with a loan and mortgage, it is rented to a third party, and the third party pays the note on your behalf? That, good sir, is constructive receipt of income and subject to tax. If you get audited you'll be in a world of hurt.

Yup. Income is income is income.

 

[brandonb]

You own a property with a loan and mortgage, it is rented to a third party, and the third party pays the note on your behalf? That, good sir, is constructive receipt of income and subject to tax. If you get audited you'll be in a world of hurt.

I've already talked to a Lawyer, and they said it was not income if I am not in control of the money. If I can use that money at any point (cash a check, money order, or something hits my bank account) and use it on hookers, then yes, its income. If it's not going through my possession, then it is not income. I talked about this scenario specifically. He said the only issue is if I claim the mortgage interest on my taxes, I cannot do that, as I did not pay the mortgage. And I haven't.

But maybe I'll get a second opinion because you're scaring me.

 

[highland145]

You are profiting by the tenant paying the mortgage. Get a new lawyer.

 

[Phoenix86]

I've already talked to a Lawyer, and they said it was not income if I am not in control of the money. If I can use that money at any point (cash a check, money order, or something hits my bank account) and use it on hookers, then yes, its income. If it's not going through my possession, then it is not income. I talked about this scenario specifically. He said the only issue is if I claim the mortgage interest on my taxes, I cannot do that, as I did not pay the mortgage. And I haven't.

But maybe I'll get a second opinion because you're scaring me.

And the title is owned/possessed by...?

 

[brandonb]

Wow. I googled my scenario, and half the people say no I do not have to pay taxes because a rental property is considered a business, and if the rent paid = mortgage costs, then it's a wash and neither a profit or loss, and therefore, doesn't have to be reported as income.

Others say yes, you have to pay taxes.

Others say no if its a family member since it can be considered a tax free gift (up to $12,000 or so). In my case it is a family member renting, so now I'm really confused. And the rent is exactly $12,000 a year.

I will just go to an income tax guy this year and let them figure out the mess, and I'll go by their recommendations.

 

[jayzds]

I've already talked to a Lawyer, and they said it was not income if I am not in control of the money. If I can use that money at any point (cash a check, money order, or something hits my bank account) and use it on hookers, then yes, its income. If it's not going through my possession, then it is not income. I talked about this scenario specifically. He said the only issue is if I claim the mortgage interest on my taxes, I cannot do that, as I did not pay the mortgage. And I haven't.

But maybe I'll get a second opinion because you're scaring me.

Wow...shady if you ask me. You need to report the income, take the deducation and depreciation on the rental and pay taxes on any net income.
Bad advice IMO, oh and here is an IRS link for an update for 2011 http://www.irs.gov/pub/irs-pdf/p527.pdf

 

[gorobei]

Wow...shady if you ask me. You need to report the income, take the deducation and depreciation on the rental and pay taxes on any net income.

THIS.

i just asked my mom (retired cpa) and income is income. it doesnt matter if the money goes through you or not.

 

[GrumpyMan]

Hey I've got an idea, why don't you ask the IRS and be sure, instead of 3rd parties?

 

[gevorg]

True. I hated to see the renters name on the caller ID. In the end, wasn't worth the stress.

there is always a property mgmt firm you can use, especially at long distance

might worth it for ~10% of rental income or whatever