For The Love Of Money Top 10 For Landlords
Excerpt from For The Love Of Money: The 411 To Taking Control Of Your Taxes and Building Your Net Worth (2005 iUniverse, Inc.), by Shannon Nash, CPA


1. Congratulations on becoming a rental real estate owner! Having another source of income can be a "Sweet Thing" (Rufus, featuring Chaka Khan, 1975, or the remake version by Mary J. Blige, 1992). Make sure you report your activities on the right tax form. Use Schedule E, Supplemental Income and Loss (Form 1040) if you do this as a side business and attach the schedule to your tax return.

2. If you own the property with your friends, families, co-workers, etc., in a partnership or limited liability company, use Form 1065, US Partnership Return of Income and make sure each member or partner is given a Schedule K- 1, US Return of Partnership Income (Form 1065) which reports their share of the business profits and losses.

3. Include all rental payments in your rental income, even if you receive it from a "Homie, Lover, Friend," (R. Kelly, 1993). What counts as rent? Pretty much everything your tenant pays you will count as rent and you have to report it in your income when you receive it. This includes the first and last month rental payments that you receive in advance. Don't include the security deposit if you plan to give that money back to the tenant at the end of the lease. Note: When you use the security deposit to cover the last month's rent, you should treat this as income at that time.

4. Cash may rule everything around you, but rent doesn't just include the "C.R.E.A.M." (Wu-Tang Clan, 1994) you receive. It also includes the value of any services that your tenant provides for you in exchange for reduced or free rent (i.e., a handyman's services). You must also add in any of your expenses that the tenant pays on your behalf. So if the tenant pays to repair a broken furnace and you deduct this amount from her monthly rent, you still have to include the full amount of her rent in your income even though you didn't actually receive that amount in a cash payment. You can, however, deduct the cost of the furnace repair as a rental expense.

5. Do you have "Work To Do," (Vanessa Williams, 1992) to get your rental property in tip top shape? If you plan on making some improvements to your rental property keep in mind that these expenses must be depreciated over what the IRS calls the useful life of the property (typically 27.5 years) rather than deducted in full in the year that you paid them. Think of an improvement as additions to a song like Snoop Dogg's "Let's Get Blown" (featuring Pharell, 2005) added to Slave's "Watching You" (1980). The beat and part of the chorus is pretty close but many of the lyrics are completely different. Whether the improvement is a better addition is up to the eyes of the beholder. An example of an improvement would be modernizing a kitchen or adding a swimming pool.

6. Repairs can be deducted in full when you pay them. A repair helps maintain or replace something that was already working in good operating condition; like P. Diddy sampling of "I'm Coming Out, by Diana Ross (1980) in "Mo Money Mo Problems," (1997). A repair would be something like replacing a broken window or door.

7. Your depreciation deduction will probably be your biggest expense. Remember, since residential real estate is made up of a building and land, to calculate your depreciation, you must deduct the cost of the land from your basis (i.e., what you paid for the property plus any improvements that you make). Next, take this amount and divide it by the property's useful life (which is typically 27.5 years).

8. Unless you're "Working Day and Night," (Michael Jackson, 1979) or "Nite and Day," (Al B. Sure, 1988) only on your real estate activity, the IRS will probably not treat you as if materially participated in this business. This means that you are running a passive activity and you can typically only take up to $25,000 in losses from your rental real estate against your other income.

9. Because you are running a passive activity, you probably won't have to pay self-employment taxes (to the tune of 15.3%) on your rental real estate income. But if you're spending most of your time as a landlord (i.e., over 750 hours in a year) you may be running a full-fledged active trade or business and self-employment taxes will probably apply to you.

10. Keep good records to support your deductions. Besides depreciation, you can deduct anything that is reasonable and necessary to being a landlord. Don't forget to add expenses, like: advertising, cleaning, mortgage interest, property taxes, insurance, repairs, supplies, maintenance, utilities, landscaping and yard maintenance, pest control, travel, and professional and management fees; but make sure to back-out the personal portion of these costs. For example, if you live in one of the four-plex units that you rent, deduct 75% (3 out of 4) of the lawn bill because 25% is for your personal use.


Copyright 2005. Shannon Nash. All rights reserved.


Shannon Nash is a tax attorney and C.P.A. She received her Bachelor's degree in accounting from the University of Virginia, McIntire School of Commerce and her law degree from the University of Virginia School of Law. She is a past officer of the American Bar Association and Chair of the National Bar Association Tax Section. She also writes the "Special Needs Journey" column.


August 1, 2005