New IRS regulations impact owners of rental, investment properties - 2012

New IRS regulations impact owners of rental, investment properties

Real Estate Tax Talk By Stephen Fishman
Inman News®

If you own rental property, or any other business or investment property, the Internal Revenue Service has bad news for you.

It has issued a massive new set of regulations (256 pages in all) with complex rules that, starting in 2012, all owners of business and investment property are supposed to follow to determine what constitutes a currently deductible repair versus an improvement that must be depreciated over several years.
Eight years in the making, the new regulations cover all types of tangible business and investment property, whether real or personal property, but they are particularly significant for owners of business and rental buildings.
Among many other things, the regulations will likely make it more difficult to classify fix-ups and other building expenses as currently deductible repairs. Instead, they will have to be treated as "improvements."
This is not good if you're a building owner because, when it comes to taxes, repairs are far more valuable than improvements. There are two big reasons why:

• repairs are currently deductible in a single year, while improvements must be depreciated over many years (39 years for nonresidential buildings, 27.5 years for residential buildings); and
• if you sell a building at a gain, you must pay a recapture tax of up to 25 percent on the depreciation you claimed in prior years.

For example, if you spend $10,000 to replace a roof for an apartment building, the cost will have to be deducted a little at a time over 27.5 years. On the other hand, if it's a repair, you can deduct the entire cost in one year.
As a result, a fix-up you can label as a repair can be up to 271 percent more valuable than an improvement.
So what's the difference between a repair and an improvement? An improvement is a major change or alteration to property. According to the new regulations, there are three types of improvements:

• betterments -- improving property or repairing defects;
• restorations -- making older property like new; and
• adaptations -- adapting property to a new use.

In contrast, a repair doesn't make property better, restore it, or adapt it to a new use. A repair is a much more minor change that just keeps property in good running order.
Until now, due to a lack of clear IRS guidelines, some building owners were able to claim repair deductions for installing new roofs, replacing heating and air conditioning systems, and making major structural changes to building interiors.
When compared to the building and its structural components as a whole, these projects could be plausibly portrayed as relatively minor and therefore treated as deductible repairs.
This is no longer possible. In effect, the new regulations require that buildings be divided up into as many as nine separate properties for tax purposes: the entire structure and up to eight separate building systems.
A significant change to any of these must be treated as an improvement and depreciated over several years. As a result, more costs will have to be classified as improvements rather than repairs.
Under the regulations, an improvement to any one of eight separate building systems constitutes an improvement to the whole building and must be depreciated:

• Heating, ventilation and air conditioning ("HVAC") systems: This includes motors, compressors, boilers, furnace, chillers, pipes, ducts and radiators.
• Plumbing systems: This includes pipes, drains, valves, sinks, bathtubs, toilets, water and sanitary sewer collection equipment, and site utility equipment used to distribute water and waste.
• Electrical systems: This includes wiring, outlets, junction boxes, lighting fixtures and connectors, and site utility equipment used to distribute electricity.
• All escalators.
• All elevators.
• Fire-protection and alarm systems: These includes sensing devices, computer controls, sprinkler heads, sprinkler mains, associated piping or plumbing, pumps, visual and audible alarms, alarm control panels, heat and smoke detectors, fire escapes, fire doors, emergency exit lighting and signage, and firefighting equipment such as extinguishers and hoses.
• Security systems: These include window and door locks, security cameras, recorders, monitors, motion detectors, security lighting, alarm systems, entry and access systems, related junction boxes, associated wiring and conduit.
• Gas distribution system: This includes pipes and equipment used to distribute gas to and from the property line and between buildings.

For example, if a building's HVAC system is upgraded, it must be classified an improvement to the whole building and depreciated. This is so even though the upgrade might not be extensive enough to constitute an improvement to the building as a whole.

9 Rental Property Tax Deductions For Landlords

http://www.candofinance.com/taxes/landlord-tax-deductions/

9 Rental Property Tax Deductions For Landlords

By Michael Diaz


Landlords must take on a significant amount of responsibility if they hope to make a profitable return on their real estate investment. In addition to finding and keeping a sufficient number of tenants, landlords are also responsible for making sure rent is paid and for the continual upkeep of their rental property.

As a result, many landlords do not take the time to learn about the numerous tax benefits associated with rental income. This is a mistake. According to the IRS, a landlord can deduct almost all of the expenses associated with renting her property. However, without a thorough understanding of the tax deductions available to landlords, you could end up missing some of these deductions and overpaying on your taxes. Therefore, if you are landlord, there are several important tax deductions that can save you a lot of money when tax time rolls around.

   
Here are nine important tax deductions that landlords can take advantage of during tax season.

Repairs

You can deduct the cost of all repairs made to your rental property. Common repairs that are eligible for the deduction include repainting, fixing the floors or gutters, fixing leaks, fixing broken windows, fixing the roof and plastering.
Keep in mind that the costs of improvements or repairs that increase the value of your rental property are not tax deductible. Repairs maintain the current value and condition of your property while improvements increase the value. See the IRS website for examples of improvements that do not qualify.

Depreciation

The depreciation deduction is a way for landlords to get a tax break on the actual cost of the rental property. The IRS has a depreciation formula which reduces the tax value of your rental property each year. The annual depreciation amount is fully deductible.
For example, if you paid $900,000 for an apartment complex, the IRS would make an annual calculation to determine the tax value of the property. If they determined that the tax value was $895,000, then you would be able to deduct $5,000 from your taxable income as a depreciation expense. Keep in mind that the depreciation expense will change each year.

Interest

You can deduct the mortgage interest on your rental property. Keep in mind that you are often able to deduct the costs of securing a mortgage as well (i.e. the closing costs). You can also deduct the interest on a loan used to fund renovations and improvements. You may also be able to deduct interest from credit cards that you used to fund rental property expenses.

Cleaning And Maintenance

Your regular maintenance and repair fees are tax deductible. These fees can include landscaping, plumbing, cleaning, pest control, trash removal and equipment rental. The cost of your monthly utilities is also tax deductible.

Employee Wages

If you hire employees to work at your rental property, you can deduct the cost of their wages. The same deduction also applies to independent contractors who work for you.

Insurance

You can deduct the insurance premiums you pay for insurance pertaining to your rental property. This includes fire, flood, hurricane, landlord liability and theft insurance. If you have employees that work at your rental property, you can also deduct the cost of their health and workers’ compensation insurance.

Legal And Professional Fees

If you pay a tax professional to do tax work related to your rental property, the costs of that work is tax deductible. Legal fees pertaining to your rental property are also deductible. Finally, expenses used for advertising your rental property are tax deductible.

Travel

If you travel for purposes related to your rental activity, you can deduct your travel expenses. For example, if you drive to your property to speak with a tenant about a complaint, you can deduct your gas expense. Long distance travel expenses including airfare and lodging are also deductible. Make sure to hold onto all of your receipts.

Damage

If your building is damaged by a natural disaster or a fire, you might be able to deduct a portion of the damage costs. The exact amount will depend on the amount of damage and the amount of insurance you have for the property.

Keep In Mind

Almost all of the expenses associated with your rental property may be tax deductible. Consult a tax adviser if you are not sure if a particular expense is eligible.
The tax deductions discussed in this article are only applicable to landlords who have no personal use of their rental properties. There are different tax rules that apply to rental income from property that is used partially for personal use.
Generally, your deductions for rental expenses must be made in the same year in which you pay them.
Keep track of your receipts, checks, and bank statements that show your deductible transactions. The IRS might want to see them at tax time.
Being a landlord is a difficult job. Don’t make it harder on yourself by missing out on important tax breaks. Getting educated on landlord tax deductions could save you thousands of dollars at tax time.

Tax Season again! Tax for Rental Income and Expenses

Tax Season again! Tax for

Rental Income and Expenses - 2013

Improvement vs. Repair

http://www.irs.gov/publications/p527/ch01.html#en_US_2013_publink1000218983

How to do Tax for closing cost (HUD-1)

How to do Tax for closing cost (HUD-1)

[From Online Forum]

Closing cost is such a vague term. Different people have different definitions.  Some people confuse closing cost with prepay items like escrow reserve.  So make sure when you say closing cost, you know what you are referring to.

But in general, the closing costs are deductible but they have to be amortized over the life of the loan. 

Turbo Tax should guide you through.

Closing costs on an investment property may fall into one of three tax categories:

• Deductible as a current expense – These amounts are deducible in full as a rental expense in the year the property is purchased
• Amortized over the life of the loan – These amounts must be deducted evenly over the total number of loan payments required at the beginning of the loan
• Added to the cost basis of the property – These amounts must be added to the cost basis (i.e. the purchase price) of the property and must be depreciated

Note: The tax treatment of the items below relate to a purchase of an investment property. The tax treatment of these items when paid in connection with the purchase of a principal residence is much different.

HUD-1 Statement Line-by-Line – Page 1

100. Gross Amount Due From Borrower

• 101. Contract sales price – This is the purchase price of the property and must be depreciated.
  
  TIP: Even if you are buying a condo, you must allocate part of this purchase price to the land that the house, building or condo sits on. The cost allocated to the land may not be deducted, depreciated or amortized. The amount that should be allocated to the land will vary based on the size and location of the property, but it is common practice to allocate 10% to 25% of the purchase price to the land.
  
   
• 102. Personal property – This is the purchase price of any personal property included with the property and must be depreciated.
• 103. Settlement charges to borrower (line 1400) – These are the total of the costs that appear on page two and are discussed below.

Adjustments for items paid by seller in advance

• 106. City/town taxes – These are allowed as a current rental deduction but must be reduced by any amount on Line 210
• 107. County taxes – These are allowed as a current rental deduction but must be reduced by any amount on Line 211
• 108. Assessments – These are allowed as a current rental deduction but must be reduced by any amount on Line 212. However, if the assessments are specifically labeled as local improvement district (LID) assessments, they are not currently deductible and must be amortized over the life of the loan.
  

200. Amounts Paid By Or In Behalf Of Borrower

• 201. Deposit or earnest money
• 202. Principal amount of new loan(s)
• 203. Existing loan(s) taken subject to

These amounts are all included in the purchase price on lines 101 and 102 above. The amounts on line 201, 202 and 203 do not get separately deducted or amortized, but the interest paid over the life of the mortgage is deductible when paid.

Adjustments for items unpaid by seller

• 210. City/town taxes
• 211. County taxes
• 212. Assessments
  

These amounts reduce any deductible amounts on lines 106, 107 and 108 above.

HUD-1 Statement Line-by-Line – Page 2

700. Total Sales/Broker’s Commission – This is paid by the seller and has no tax effect on the buyer.

800. Items Payable In Connection With Loan

• 801. Loan origination fee
• 802. Loan discount These items must be amortized over the life of the loan.
  TIP: Many people think that these amounts (usually referred to as points) are a current tax deduction. However, the only time that points are allowed as a current deduction is if the points are paid in connection with the purchase of a primary residence. Points paid in connection with the purchase of an investment property or paid on a refinancing of a personal residence or an investment property must be amortized over the life of the loan.
  
• 803. Appraisal fee
• 804. Credit report
• 805. Lender’s inspection fee
• 806. Mortgage insurance application fee
• 807. Assumption fee These items must be amortized over the life of the loan.
  

900. Items Required By Lender To Be Paid In Advance

• 901. Prorated interest – Deductible as a current rental expense.
  
  TIP: This amount will usually appear on Form 1098 that you will receive at the end of the year showing how much interest you paid during the year. However, not all lenders include this amount on the form so be sure to check with your lender to find out.
• 902. Mortgage insurance – Amortized over the period the payment covers, which is usually one year
• 903. Hazard insurance – Amortized over the period the payment covers, which is usually one year

1000. Reserves Deposited With Lender

• 1001. Hazard insurance.
• 1002. Mortgage insurance.
• 1003. City property taxes.
• 1004. County property taxes.
• 1005. Annual assessments These amounts are deposited (escrowed) with the lender and are deductible when they are disbursed from escrow by the lender. These amounts paid from escrow should be reported on your Form 1098 at the end of the year.
  

1100. Title Charges

• 1101. Settlement or closing fee
• 1102. Abstract or title search
• 1103. Title examination
• 1104. Title insurance binder.
• 1105. Document preparation
• 1106. Notary fees
• 1107. Attorney’s fees
• 1108. Title insurance
• 1109. Lender’s coverage
• 1110. Owner’s coverage
  All of these amounts are added to the cost basis of the property (line 101) and must be depreciated.
  

1200. Government Recording and Transfer Charges

• 1201. Recording fees
• 1202. City/county tax/stamps
• 1203. State tax/stamps
  These amounts are added to the cost basis of the property (line 101) and must be depreciated.
  

1300. Additional Settlement Charges

• 1301. Survey
• 1302. Pest inspection
  These amounts are added to the cost basis of the property (line 101) and must be depreciated.
  

There may be other miscellaneous closing costs that you may pay in connection with buying an investment property. While the tax treatment of these amounts may vary, the general rules of thumb are that the costs associated with operating the property (such as real estate taxes and insurance) are deductible as current expenses, the costs associated with obtaining the mortgage (such as lender fees and mortgage application fees) must be amortized over the life of the loan and the costs associated with purchasing the property (such as title charges and recording fees) must be added to the cost basis of the property and depreciated.

Disclaimer:  Any tax advice contained in this article is not intended or written to be used, and cannot be used, to avoid penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

Income, Poverty, and Health Insurance Coverage in the United States: 2010

http://www.census.gov/prod/2011pubs/p60-239.pdf

Obama Makes It Official: 1099 Repeal Signed Into Law

http://www.kaiserhealthnews.org/daily-reports/2011/april/15/1099-repeal.aspx

Topics: Politics, Health Reform

Apr 15, 2011

Because the 1099 reporting requirement was a non-health related revenue-raising provision within the health law, its repeal is paid for with a payback provision that recoups funds from people who exceed their estimated income level during the course of the year after receiving subsidies for health insurance.

The Hill: Obama Lifts 1099 Tax Reporting Burden
President Obama on Thursday signed into law a bill repealing the health care reform law's 1099 tax reporting requirement, the first provision of the Democrats' law to get the ax. The Senate passed the law, 87-12, on April 5. The Republican controlled House cleared it in March. Obama signed the bill, which was defeated several times, despite taking issue with the ways it's paid for: a "clawback" provision that goes after people who get more in health care subsidies than entitled to under the health care reform law. "Today, I was pleased to take another step to relieve unnecessary burdens on small businesses by signing H.R. 4 into law," reads the president's signing statement (Pecquet, 4/14).

Bloomberg: Obama Signs Law Repealing Business Tax Reporting Mandate
President Barack Obama signed a bill repealing a tax-compliance mandate in last year's health care law, giving a victory to business groups that led a campaign against the requirement. The repealed provision, under which companies would have had to report more transactions to the Internal Revenue Service, was included in the law as a revenue-raising measure. It was to have taken effect in 2012 (Rubin, 4/14).

CQ HealthBeat: President Signs 1099 Repeal Into Law
President Obama on Thursday signed into law the first significant revocation of a portion of the health care law — a business tax-reporting requirement that members of both political parties disliked. Obama signed HR 4, which repeals a provision that required business and real estate owners to file a 1099 form with the IRS for every vendor to whom they paid more than $600 in a year. Business groups had lobbied hard against the provision. ... The $22 billion cost of the 1099 legislation was offset by requiring some people, if their income level increases during the year, to pay back a portion of the subsidies they receive to join health insurance exchanges created under the law (Norman, 4/14).

This is part of Kaiser Health News' Daily Report - a summary of health policy coverage from more than 300 news organizations. The full summary of the day's news can be found here and you can sign up for e-mail subscriptions to the Daily Report here. In addition, our staff of reporters and correspondents file original stories each day, which you can find on our home page.