Question

Renting my home

Forum|Forum|6 years ago
June 6, 2019
6 replies
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Will I have to file any forms with the IRS once I rent out my home? What forms would I need to file then and at the end of the year? How often would I have to pay taxes? Will I have to provide any documents to my tenants?

TurboTax Deluxe Online

Carl11_2

Employee

Assuming the home is/was your primary residence on jan 1 of the 2017 tax year, you'll basically be converting your primary residence to residential rental real estate on your 2017 tax return. You'll be able to report all rental income and rental expesnes on SCH E as a part of your personal tax return.
If you've got more details to offer on what the plan is, I've tons of information you may find educational and helpful on the tax filing front.

L

lromrocksAuthor

What details would you need? Tenants will be on property Sept. 1 2017. Rent will be $1100.

Carl11_2

Employee

Sorry, I should have realized to ask, for I too back in the day when I first became a landlord, didn't know it mattered.
- On what date in 2017 did or will you be moving out?
- On what date will it be possible for a renter to move in? (In other words, after your move out date, on what date will the property be "move-in ready"?)

L

lromrocksAuthor

I appreciate your help. I'm curious because I would not like to have any issues with the IRS. I will be moved out by the 15th of Aug. The property will be move in ready by the 25th of Aug.

Carl11_2

Employee

I just found what I was looking for. Thought I had accidently deleted it. Then realized I was responding to you from another computer, and not the one I normally use for these forums. So here's the whole shebang.

For a first time landlord I "HIGHLY" encourage you "NOT" use the online version of TurboTax for your first tax year you're reporting rental income. The CD/Desktop version that you physically install on your computer is by far more user-friendly, easier to navigate and easier to "go back" and fix things when you realize you make an incorrect selection 10 screens back. One advantage of the desktop version is the ability to view in "forms mode" (which is not possible with the online version) so you can see and understand how the program comes up with some of the figures which you will undoubtedly question.

If you did your 2016 return with the online version, then download the .tax2016 file ***NOW*** so that you won't have to pay to do it after October 2016. You will need the .tax2016 file on your computer, so you can import from it into the desktop version of TurboTax 2017. While you're at it, go ahead and download the PDF file of your 2016 return also. If you need to actually see something on your 2016 return, you can't "view" the .tax2016 file unless you have the desktop version of TurboTax 2016 installed on your computer. But with the PDF version you can open the PDF file and view your 2016 return "as filed".

Rental Property Dates & Numbers That Matter.

Date of Conversion - If this was your primary residence before, then this date is the day AFTER you moved out.
In Service Date - This is the date a renter "could" have moved in. Usually, this date is the day you put the FOR RENT sign in the front yard.
Number of days Rented - the day count for this starts from the first day a renter "could" have moved in. That should be your "in service" date if you were asked for that. vacant periods between renters count also PROVIDED you did not live in the house for one single day during said period of vacancy.
Days of Personal Use - This number will be a big fat ZERO. Read the screen. It's asking for the number of days you lived in the property AFTER you converted it to a rental. I seriously doubt (though it is possible) that you lived in the house (or space, if renting a part of your home) as your primary residence or 2nd home, after you converted it to a rental.
Business Use Percentage. 100%. I'll put that in words so there's no doubt I didn't make a typo here. One Hundred Percent. After you converted this property or space to rental use, it was one hundred percent business use. What you used it for prior to the date of conversion doesn't count.

RENTAL POPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED

Property Improvement.

Property improvements are expenses you incur that add value to the property. Expenses for this are entered in the Assets/Depreciation section and depreciated over time. Property improvements can be done at any time after your initial purchase of the property. It does not matter if it was your residence or a rental at the time of the improvement. It still adds value to the property.

To be classified as a property improvement, two criteria must be met:

1) The improvement must become "a material part of" the property. For example, remodeling the bathroom, new cabinets or appliances in the kitchen. New carpet. Replacing that old Central Air unit.

2) The improvement must add "real" value to the property. In other words, when the property is appraised by a qualified, certified, licensed property appraiser, he will appraise it at a higher value, than he would have without the improvements.

Cleaning & Maintenance

Those expenses incurred to maintain the rental property and it's assets in the useable condition the property and/or asset was designed and intended for. Routine cleaning and maintenance expenses are only deductible if they are incurred while the property is classified as a rental. Cleaning and maintenance expenses incurred in the process of preparing the property for rent are not classified as cleaning/maintenance costs. They are instead classified as startup costs, amortized as such and depreciated over time.

Repair

Those expenses incurred to return the property or it's assets to the same useable condition they were in, prior to the event that caused the property or asset to be unusable. Repair expenses incurred are only deductible if incurred while the property is classified as a rental. Repair costs incurred in the process of preparing the property for rent are classified as startup costs, amortized as such and depreciated over time.

Startup Costs

Please note that if residential rental income is not your PRIMARY business, and your PRIMARY source of income, then your rental business is considered to be passive, and you flat out, no way, no how , are not allowed to deduct your startup costs. Period. The IRS says so. See https://www.irs.gov/pub/irs-drop/rr-99-23.pdf and please take note that rental property produces “passive” income, while other types of businesses produce “active” income. Your rental property is not classified as your “active” business, unless you are a real estate professional, an active participant in the management of the property, and it provides a substantial (more than half) amount of your taxable income for the year. All three requirements must be met. There are no exceptions

Start up costs are expenses incurred while preparing the property for rent, with the express purpose being to prepare it for rent, before it is available for rent. These costs do include repair, cleaning and non-recurring maintenance cost. It does NOT include property improvements. With a normal business that produces active income (rental income is passive) you would amortize these costs over 15 years. But you can’t do that with a rental property. However, you can deduct a maximum of $5000 in startup costs in the first year the rental is available for rent, PROVIDED your total startup costs do not exceed $50,000. This is reported on line 18, “Other Expenses” of SCH E, and should be labeled “start up expenses”.

Additional clarifications: Painting a room does not qualify as a property improvement. While the paint does become “a material part of” the property, from the perspective of a property appraiser, it doesn’t add “real value” to the property.

However, when you do something like convert the garage into a 3rd bedroom for example, making a 2 bedroom house into a 3 bedroom house adds “real value”. Of course, when you convert the garage to a bedroom, you’re going to paint it. But you will include the cost of painting as a part of the property improvement – not an expense separate from it.

Carl11_2

Employee

Additional info I just found. When setting up this rental for the fist time in the program, you will need the HUD-1 closing statement you received when you initially purchased the property. Doesn't matter if you purchased it 50 years ago. So find that HUD-1 closing statement now. If you don't have it or can't find it (safe deposit box most likely) then contact your mortgage holder. They will definitely have a copy of it. You can expect the mortgage holder to charge you a nominal fee for a copy. but go ahead and get it now, so you don't find yourself "waiting" when you want to get your taxes done, filed and over with. If at any time you refinanced the property, you will need the HUD-1 closing statements for all refi's you may have done after the initial purchase also. Keep all receipts for EVERYTHING! Every single penny you spend in the name of a "rental expense" will need to be proven if you're ever audited. It's best to create a folder in your filing cabinet (buy a cabinet if you don't have one already) where you put every single scrap of paper for anything and everything related to your rental. The reason for this, is because there's a LOT of deductible expenses on the HUD-1's the program will ask you for. So you don't want to end up entering zeros for those deductible expenses, just because you don't have the HUD-1 to "prove" your expenses with, if you're ever audited. Three rules to remember when dealing with the IRS should you ever be audited. - You are guilty until proven innocent. - The burden of proof is on the accused (that's you), and not the accuser. - If it's not in writing, then it flat out did not occur. I myself have three rentals, with a manila folder for each. There's labeled RENTAL A 2017, RENTAL B 2017, and RENTAL C 2017. In each, I have the rental contract for the current tenant, all receipts for rent paid. I deposit rent in a savings account that's only for rental income, and then mark the deposit receipt with "Rental A rent for March 2017" or whatever, and put it in that manila folder. I also put all paperwork, receipts, warranty information and the such for each rental property in it's appropriate folder. Then at tax time I pull the folder and use it for "doing the math" as I prepare my tax return. When done, if the same renter is still in the property the only thing that gets transferred to the 2018 folder is the rental contract, and any warranty information for anything pertaining to the rental that is still under warranty coverage. RENTAL DWELLING INSURANCE - Man, I glad I remembered this! When you lived in the house you had a homeowner's insurance policy on that house. When you convert the property to a rental, your homeowner's insurance WILL NOT PROTECT YOU! That's because one of the stipulations in any homeowner insurance policy is that the property NOT be used for ANYTHING other than your residence. So converting it to a rental INVALIDATES YOUR HOMEOWNER'S INSURANCE POLICY! You need to contact your insurer and inform them that you want to transfer your current homeowner's policy to your new primary residence (assuming you own it, and have not insured it some other way already.) If you have already insured your new home, then you need to cancel the current policy on the old home after you replace it with what's called a "Rental Dwelling Policy" Generally, a Rental Dwelling Policy is cheaper (depending on where you are in the country) and covers only the property that *you* own. It also provides at a minimum, $300,000 of liability coverage should your tenant ever get hurt on your property and you are found liable for their medical bills/injuries. You should inform your tenant in the rental contract of the fact that you have a Rental Dwelling Insurance Policy that does NOT cover the tenant's property, and advise your tenant to purchase "renters insurance" If you want to "require" your tenants to have renters insurance in your rental contract with them, you can. Generally, renters insurance for a tenant is less than $200/year (again, depending on where you are in the country) and it covers only the tenant's property. Such a policy will also have $300,000 liability insurance for the tenant for any losses you may incur at the fault of the tenant. For example, if there's a fire in the kitchen because the tentant left a pot of grease boiling on the stove and your property gets' burned to the ground, your policy will cover your losses including up to 85% of lost rent for a maximum of 12 months usually. The tenant's renters policy will cover the tenants losses. But lets say the fire investigator determines the cause of the fire to be at the "gross negligence" of the tenant. Well, you're not worried because your insurance will cover your losses. HOWEVER........ If your insurance company decides to go after your tenant for reimbursement, there's two things to consider here. 1) This particular situation is between your insurance company and the tenant. There's nothing your can do about it, as you are not in that equiation. 2) Most renters don't have any money. (If they did, they would buy, not rent). So if the unfortunate ever happens and your insurance company goes after your tenant, if the tenant has "renters insurance" (which also includes a minimum of $300,000 of liability) everyone walks away paid and happy. On one of my three rentals, I require in the contract for the tenant to have renters insurance, and I also require the policy names me as the primary beneficiary for any liability claims. You know what? I practically wrote a book on this rental stuff for first time landlords. You want a copy?