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Rental Property CPA accountant discusses tax form Schedule E | residential rental properties | commercial rental properties

Rental Property CPA accountant

Most Schedule E tax preparation is straight forward. But there are IRS wrinkles. If you’re out of your comfort zone consider calling us free phone consult. Our virtual office means distance isn’t a factor with serving you, regardless of where you live or your rental properties are located. (910) 399-2705.

Rental property CPA accountants field lots of questions about tax form Schedule E. Generally they’re about residential rental property. But sometimes they’re on commercial rental property.  Here’s what I’m asked most often. I hope it helps.

What is Schedule E?

Tax form Schedule E attaches to your Form 1040. It reports your rental income and expenses for the tax year. Like most IRS tax forms, Schedule E has multiple purposes. But I’m just discussing rental properties in this post. The rental property profit or loss then flows to Form 1040. But the IRS adds wrinkles to the issue when there’s a loss.

Tax form Schedule E versus tax Form 8825

If you hold rental property personally, use Schedule E. If your rental property is held by a Corporation, Partnership, LLC etc., use Form 8825. Otherwise they’re similar.

Residential rental property versus commercial rental property

Generally I see most residential rental property held personally and thus reported on tax form Schedule E. Most commercial rental property clients hold their assets through another entity, like a Partnership. So they use tax Form 8825. But exceptions abound. Partnerships, S Corporations etc. add a level of liability protection. So if a tenant sues the Corporation and wins, their lawyer has a harder time attaching to the personal assets of the Shareholder.

Listing your rental property income and expenses correctly on IRS tax form Schedule E

When you look at Schedule E, the IRS has categories they want you to use e.g. property manager, repairs, real estate taxes, mortgage interest, depreciation etc. Why? It’s easier to catch error and fraud. Here’s an example. Let’s say you’re reporting two residential rental properties on Schedule E. You list the property manager fees correctly. Schedule E shows a $10,000 loss that you carry over to page one of Form 1040. The passive loss rules generally prevent deducting passive rental activity losses. But there’s an exception. Landlords that have less than $100,000 of income, and actively manage their rental properties, can deduct up to $25,000 of passive rental property loss. Note the use of a property manager makes it harder to claim you’re active in the rental property.

What happens to unusable Schedule E Losses?

You can claim unused rental property losses in prior tax years when you sell the rental property.

What is residential rental property depreciation?

Even you pay cash for your residential rental property you can’t deduct the entire purchase price in the first year. Depreciation is allocating an asset’s cost over the expected life of the asset. Let’s say you bought a $320,000 residential rental property on January 1st where the land value is $45,000. You can never depreciate land.  And the IRS forces you to use 27.5 years. So you can deduct $10,000 of depreciation in the first year ($320,000 – $45,000 = $275,000, $275,000 divided by 27.5 years = $10,000).

 Becoming a real estate professional

The IRS defines what it takes to be a real estate professional. Rental property losses are fully deductible for a professional. Be very careful, the IRS audits Schedule E for this issue. Be ready to provide appropriate proof that are a real estate professional.

I’m a rental property CPA accountant because my extended family owns rental properties. So you know stay on top of tax form Schedule E and Form 8825. Our virtual office means distance isn’t a factor in providing rental property tax and accounting service. (910) 399-2705.

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