May 7, 2024 • 25 mins
This episode sheds light on the intricacies of tax rules that rental property investors face. From the various deductions and tax benefits real estate investors can enjoy to the different forms of property ownership and their implications on tax filings, the episode is brimming with valuable guidance.
Listeners get a rundown of how rental properties are taxed, the differences between gross and net income taxation, and the perks of owning rental properties. The conversation moves through the importance of reporting each property's details accurately and touches upon lesser-known tax-related aspects like qualified joint ventures and passive activity losses.
Key Takeaways:
- Rental property owners pay tax on net income, not gross income, allowing deductions like mortgage interest, property taxes, repairs, and depreciation.
- Each rental property must be individually reported with the correct property type, rental days, personal use days, and physical address on tax forms such as Schedule E or Form 8825.
- Single-member LLCs and qualified joint ventures report on Schedule E of personal tax returns, while multi-member LLCs, partnerships, and S corporations must file Form 8825.
- The importance of the proper classification of each property during tax filings cannot be overstated, especially as it impacts lending decisions and IRS reporting.
- Depreciation is a significant deduction for rental property owners, offering a tax shield even as property values appreciate.
Notable Quotes:
- "You want to properly report the fair market rental days, the personal use days, and the property type." - Chris Picciurro
- "Make sure you're getting the depreciation deduction and make sure that each property is not only identified as the correct type but the correct rental days." - Chris Picciurro
- "Remember, if you have a rental property, it's going to fall into three buckets." - Chris Picciurro
- "There are a couple of checkboxes that you have to be keenly aware of." - Chris Picciurro
- "Listen to the podcast on step up and basis. So if you are listening to this and you're a taxpayer and you're working in rental properties and you realize the property was inherited by someone, definitely think about the step up in basis." - Chris Picciurro
Episode Sponsor:
REPStracker
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Intro (00:04):
Welcome to the Teaching Tax Flow podcast,
where the goal is to empower andeducate you to legally and
ethically minimize taxes paidover your lifetime. Welcome back
to the teaching tax flowpodcast, everybody. Episode 82,
we are jumping into how rentalproperties are taxed and maybe
(00:26):
other non taxed. We'll see howit goes. But before that, let's
take a brief moment as alwaysand thank our episode sponsor.
Ad Read (00:35):
This podcast is sponsored by Reps Tracker. Are
you a real estate investor whois bogged down with the huge tax
burden? Real estate investingcan open the door to powerful
tax benefits. Reps Tracker canstreamline the process of
accelerating theseopportunities. To take advantage
of a special TTF communitydiscount, go to teaching tax
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Better yet, click on the linkbelow in this episode's show
notes to go directly to therep's tracker sign up page.
John Tripolsky (01:07):
Welcome back everybody. Today, as mentioned
in the intro, we are gonna lookat rental properties and how
they're taxed. So a lot ofpeople have this idea, right,
of, oh, I wanna own all theseproperties, these houses. I
wanna be a landlord. You hear alot.
Right? But how familiar are youand others with how that
(01:27):
actually relates to your taxsituation? So as I always like
to poke fun at, but nothing'srolling off the tongue today, so
we just bring them back on hereanyways. Chris Pacquero, the man
with the answers, the tax guy.What's happening?
Chris Picciurro (01:42):
How are you today, Johnny t? Oh, I'm feeling
taxi.
John Tripolsky (01:46):
Feeling very taxi today.
Chris Picciurro (01:47):
Lord, have mercy.
John Tripolsky (01:49):
Here we go. But
Chris Picciurro (01:51):
I'm not feeling so taxi. I feel I feel good. I
feel, excited to talk about howrental properties are taxed.
Obviously, there's some there'ssome wrinkles, so we're gonna be
talking about the 99%situations. And you're right.
John Tripolsky (02:04):
Some a lot of people become landlords,
property owners. Landlord'skinda one of those terms that,
it's not too PC anymore, butinvestors or what have you. It
it
felt weird saying it. Honestly,like, it didn't feel right. I
said landlord. I thought, well,you know, like, I kinda nestled
down in my chair a little bitwhen I
Chris Picciurro (02:25):
saw that. That's okay. And some people
become property owners, rentalproperty owners. Purposely,
sometimes we have an accidentallandlord or meaning, hey. You
lived in a primary residence.
You had an unexpected jobchange. You you don't wanna sell
the property, you think you'llbe back, or maybe you're in the
military and you overseas for awhile, so you rent your property
(02:46):
out when you're out of town orliving
John Tripolsky (02:49):
somewhere. Hey, well, that's how Chris, you know
that, you know, this story alittle bit more. That's how I,
got into the Airbnb game about13 years ago. Right? I didn't
even have any pictures on thatlisting.
It's like, what in the world didI just do? I had no idea what I
was doing, but figured it out.So thank god for people like
you. You can, you know, makesense of the muddy waters when
sometimes people don't know. Butthen also what we're gonna talk
(03:11):
about here too, Chris, are wegonna look at anything between
long term and short termrentals, or are we just kinda
kinda putting them all together?
We're gonna put them alltogether. I'm willing to say
this. There is something and wehad another episode on the short
term rental loophole. There is a1 to 2% situation where you are
providing substantial services,according to the IRS, for your
(03:35):
short term rental property. Thatis extremely rare.
If that's the case, what we'regonna talk about today does not
pertain to you. We're gonna betalking about the 99.9%
Chris Picciurro (03:45):
of all rental property situation, how rental
properties are taxed and how youreport them on your tax return.
We talk, John, a lot about taxagencies being your involuntary
business partner. In teachingtax law, we talk about that tax
laws are written to encourageand discourage certain behavior.
(04:08):
We also have an episode that notall income is taxed to the same,
shameless plug. I
John Tripolsky (04:13):
think it
Chris Picciurro (04:13):
was, like, one of the first 10. I don't know.
John Tripolsky (04:15):
Yeah. Go, yeah, go back and listen to those.
That's when our auto audioquality was subpar. We were just
so excited to talk about thosethings. But
Chris Picciurro (04:23):
Well, when you when you launch a podcast on a
pizza abused pizza box, what doyou expect?
John Tripolsky (04:29):
Disclaimer but not a disclaimer. Yes. That
really did happen. And thatyeah. Go back and listen to some
other episodes, and maybe youcan maybe There There you go.
Yeah. We'll send you a gift cardfor Domino's.
Chris Picciurro (04:47):
So why being a property owner, a rental
property owner is attractive? Isthat the first thing I wanna
talk about when you're reportinghow how this income is reported
is that you are paying tax onyour net income. Now there are a
lot of rules, what are calledpassive activity loss rules, and
there are situations where onpaper, you can have a loss from
(05:07):
a rental property that actuallyoffsets other types of income.
But the the thing you have toremember is you're paying tax on
your net income and not yourgross income when it comes to
owning rental property. So youreport your rents collected, and
you get to deduct all of theordinary and necessary business
(05:30):
expenses for a rental propertyowner.
Those are gonna be your mortgageinterest, association dues,
property taxes, potentiallyproperty management fees,
repairs, maintenance, all ofthose common type of
expenditures.
John Tripolsky (05:45):
Not your dog food if you're a freelance
graphic designer?
Chris Picciurro (05:50):
No. No. Not in your crate, John.
John Tripolsky (05:53):
Because I'm looking at a birthday card here
from my daughter from a coupleweeks ago that literally says
happy birthday, dad, and it hasa giant donkey on it. So I don't
know if she's calling me ajackass already or what the deal
is, but animals. Actually,there's a lot on lot on that
topic too when we talked about,10 90 nines and dogs. So
Absolutely.
Chris Picciurro (06:12):
I mean, there are rare cases where I you could
deduct the dog food. If, if youown, like, a junkyard or a
scrapyard and in a area that's,let's just say, not the best
area and you have pit bulls thatlive there and they're and they
are used for security purposesonly, they're not personal pets,
(06:33):
they actually live outside, thenthat could be a deduction
potentially. But we're talkingabout rental real estate today.
The other deduction you get isdepreciation. Now we talked a
little bit about depreciationwhen we had our did our cost
segregation study, podcast, butwhat depreciation is is it can
be a confusing term fortaxpayers.
(06:55):
Because when you buy a property,why are you buying a property?
So it appreciates. So it goes upin value. So depreciation is
just a condensed term, that weuse to describe the cost
recovery of that property. So,for instance, John, if you
bought a rental property that isworth for $200,000, let's assume
(07:16):
$40,000 of that property isallocated to land.
You wanna look at those propertytax records to determine that.
And $160,000 of that property isallocated to the building
portion. You depreciate thebuilding portion, meaning you
get to deduct that. And onresidential property, that's
over a 27 and a half yearperiod. Commercial property, 39
years.
(07:36):
The point is, even though theproperty is going up in value,
if you have a mortgage or don'thave a mortgage, you still get
the depreciation deduction, andthat deduction can offset your
rental income. So the firstthing to remember when you're
reporting rental property, yourtakeaway from this piece, I get
to pay tax on my net income, notmy gross income. So that's a
(07:58):
win. Now most people own rentalproperty in individually or in a
single member LLC. Shamelessplug for episode 2, actually
don't listen to it because youwould probably cringe.
John Tripolsky (08:15):
Although that's one of our most popular ones, it
still holds the number one spotfor the most popular, I think,
for two reasons. Right? One ofthem, I think, is I purposely
tried to get you all fired up onit because you as a tax pro.
Right? Like and we'll get intothis, I'm sure, is maybe some of
the, we'll call it a disillusionmaybe with, LLCs.
But then also, yeah, that wouldI mean, this is a great topic.
(08:37):
And, again, looking at ourroster here for the upcoming
month, month and a half, we'reactually gonna revisit that one.
So shameless plug to subscribeto the podcast. Yes. Please do.
But if you own the propertyindividually or if you own it in
Chris Picciurro (08:52):
a single member LLC or what's called a qualified
joint venture with a spouse,that property is reported on
what's called a Schedule E.Schedule e is just attached to,
in this case, your personal taxreturn. And the schedule e just
really breaks down many thingsabout the property. Now many
(09:14):
most people are focused on am Ireporting the proper amount of
income, am I reporting theproper amount of deductions, but
there are other things the IRSis very, very interested in. And
not only is the IRS interestedin when we're talking about
rental property reporting forthat individual or single member
LLC that that is a that'sreporting on schedule e, Lenders
(09:36):
are very, very interested inwhat's on this.
Underwriters. In fact, ourfriend of the show, Brenna Carls
from The Mortgage Shop, talks alot about understanding there
are things on your Schedule Ethat play a role in your
lendability that you're not eventhinking of. So let me explain
that, John. On schedule e, youhave to identify each property
(10:01):
separately. So every if you own10 properties, you have 10
different entries on schedule e.
Each schedule e, you could putup to 3 properties on. You want
the the physical address of theproperty has to go on the form.
But also property type. So youhave to tell the IRS, is this a
single family home? Is it amultifamily home?
Is it commercial? Is it a selfrental? Is it a short term or
(10:23):
vacation rental? That's very,very important. Or is it just
land?
Because if you have land andyou're getting taking a
depreciation deduction,shameless plug to our to our
previous podcast. We're gonna doa lot of shameless plugs today
on the IRS data book. Your yourexamination percentage is
probably a lot higher than wejust talked about last episode.
(10:44):
So that's a factor because ifyou're going through
underwriting and you're tryingto add your portfolio, the type
of property plays a role. Also,you have to report fair rental
days versus personal use days.
So we see this sometimes wheresomeone is is lazy or some a tax
professional is lazy or thesoftware just defaults, where
you may have bought a property.Let me give you an example. You
(11:05):
bought a property in October.You placed it in the service,
you report the rental income. Onyour tax form, you write and you
put down that you owned it.
There was 365 for your rentaldays. What's the problem? An
underwriter is gonna say, well,if this property produced
$15,000 worth of revenue in allyear, that's not very good when
our debt service is a lothigher. But if the underwriter
(11:27):
or bank says, oh, okay. You onlyowned it for 90 days and it
produced $15,000, then they cansurmise that it might produce
$60,000 a year.
So my point is when you'rereporting on schedule e, we
talked about those technicalparts about about it previously.
Make sure that you properlyreport the fair market rental
days, the personal use days inthe property type. And here's a
(11:51):
here's a dumb guy question, youknow, from me as I always try to
John Tripolsky (11:54):
have one of them or I try not to have them, but I
do. So I'm actually looking at aSchedule e here in front of me.
Right? And and the lines, youknow, where it comes to, you
know, listing each of thephysical addresses for each
property, so up to 3. You havethose columns, fair rental or,
fair rental days, personal usedays.
And then there's a little columnwith some checkbox. It looks
like it's QJV. What what exactlyis QJV? There are
Chris Picciurro (12:17):
a couple checkboxes that you have to be
keenly aware of. QJV isqualified joint venture. So if
you live in a community propertystate and you and your spouse
form a limited liability companyor an LLC, and you put the
property in the LLC or apartnership, let's say, in
(12:38):
general, you would have to filea partnership tax return, and
those returns on average arestart at $2,000 a year to have
those prepared. And then youissue k ones, we're gonna talk
about that in a moment, but yourlet's just put it this way. Then
your tax compliance is a lot alot more arduous.
So instead of having to gothrough the process of filing a
(12:58):
partnership return, if youqualify, then you report to the
IRS, hey. This is a qualifiedjoint venture owned by both
spouses on this tax return.That's why IRS I'm not filing a
partnership return for thisproperty. The other box is oh,
great great. John, I'm so proudof you
John Tripolsky (13:15):
for looking at the schedule e. Hey. You know,
every are
Chris Picciurro (13:17):
you are you gonna go to the eye doctor,
like, crazy?
John Tripolsky (13:19):
In a while. Have eyes bleeding. You know, it's
yeah. I kinda I closed one eyeand kinda looked at it, like,
see what what this thing isright here. You know, I hear
schedule, and it reminds me of,you know, high school and
college days where I didn't likeit.
You know? Because kind of it
Chris Picciurro (13:32):
yeah. I know you're a loose cannon, John. You
don't like you're you're you'reyou don't like having a having a
a schedule. Although you youreally don't like when people
are late, and I love that aboutyou. That's one of your big pet
peeves.
John Tripolsky (13:43):
Drives me nuts. I won't mention you know, let's
not get off topic, but now yougot me all flustered up. It's
kinda like when everybody, saysthat I'm a was it a 10.99
employee? It's kinda what yousaid about that. So I know I
know that gets you fired up.
10. It's a yeah. Good segue,though, because
Chris Picciurro (14:01):
the last question that is on the form is
did you make payments that youshould issue a 10.99 on? So if
you're a rental property owner,the IRS now says, hey. Should
you have issued 10.90 nines?It's a really funny question,
and you either say yes or no,and then they ask you, if yes,
wait, did you make any paymentsthat would require you to file a
10.99? Yes or no?
(14:22):
Let's say I say yes. Hey. If yousaid yes, did you file them? I'd
rather see a taxider wheresomeone said, yeah. I did I did
make payments for the 10.99,but, yes, screw you.
I'm not filing 1.
John Tripolsky (14:32):
What you know, one day, Chris, we're we're
gonna put the call out there. Ifsomebody has so much money that
they don't know any don't knowany better way you know, thing
to spend it on except pay finesto the IRS, We should try to,
you know, find that person andjust try to, you know, muck with
the IRS as much as we can bycontradicting answers and, you
(14:53):
know, timing how long it takesto get an audit. So if anybody
wants to
Chris Picciurro (14:56):
do that, I'm sure we can blush. Well, let's
move on to the second popularfact pattern when you own
property.
John Tripolsky (15:05):
Assume the property I like how you
completely, like, kick my my BScomment to the side. You're
like, no. I don't wanna workwith that person. No. I want
nothing to do with
Chris Picciurro (15:13):
No. Heck no. And and the people in teaching
tax law community appreciatethat, the other tax
professionals. The motherfuckingOh, anyways.
John Tripolsky (15:20):
Well, you know, back to a regularly scheduled
program.
Chris Picciurro (15:23):
I didn't even acknowledge pivot redirect. I
just pivoted and redirected onthat one. So that was that's
just the way it goes. So whiletime let's assume let's talk
about reporting for someone thathas either a multi member LLC
taxed as a partnership or is apartnership or, oh, gosh, is an
s corporation, which is gonnamake our our tax professional
(15:45):
friends cringe when you haverental property in the s corp,
but we're not gonna get upset.But let's assume you own rental
property in one of those threetypes of entities.
The multi member LLC and thepartnership, that is reported on
a form 1065, an s corp reportedon an 11 an 1120. Yes. There are
(16:06):
episodes in the podcast aboutthese forms. Regardless of if
you're an s corp or taxed as apartnership, the rental
activity, other than being onthe balance sheet, is reported
on a form 8825. I wonder I wannabe the person at the IRS that
gets to number these forms.
(16:26):
Like, wow. Very into, like, ah,we don't have we need a new one
in the 800. I'm sure there's amethod to their madness, but,
like, 88 you know, shoot. Wewe've got a gap. Let's just call
it form 422 or something.
Right.
John Tripolsky (16:41):
Yeah. Because I highly doubt they have, you
know, 9 1,000 forms.
Chris Picciurro (16:44):
It feels like it sometimes, but I really mean.
So the 8825, it really sets upsimilarly to the schedule e. But
this is so, you know, you haveto report the fair market days,
the personal use days, what typeof property, the physical
address of the property, grossrent, and then your rental real
estate expenses includingdepreciation. Each Form 8825 has
(17:09):
the has the capacity for 4rental properties to be reported
on it, whereas schedule e onlyhas 3. So if you have 12
properties, not a big deal.
I mean, we can shoot on ourprivate CEP practice, we've got
clients with over 200properties, and we have, you
know, 50 form 8825s attached tothe partnership return or per so
that that happens. But, so the8825, again, make sure you take
(17:32):
your depreciation deduction. Thedifference on the partnership
and s corp return is that youhave to you have to report the
balance sheet, which would meanyour any mortgage amount, any,
asset amount, for the, for theentity. So so, yeah, very
similar. And the takeaway hereis, remember, each property
(17:57):
should be reported separately.
Now there are some exceptions tothat. An exception might be,
like, an apartment complex or anapartment building that has 20
units in it. You're not gonnaput each unit separately. That
apartment is its own, you know,physical address. Or if you have
a duplex, you know, duplex withmultiple addresses, like, it
(18:19):
could be 110 dash 112 MainStreet could go on one line.
So make sure, you know, becausebecause it gets really muddy and
the IRS doesn't like this andnor do banks. And I've seen it,
unfortunately, where I see someI see someone that has 8 rental
properties and they put it allon one line of their Schedule E
and they just slap in theirrental property portfolio.
(18:42):
That's that's not a good look,John. Nope. It's not not a good
look.
John Tripolsky (18:46):
So I can and I can see exactly why.
Chris Picciurro (18:48):
For that. Like, that go beyond this podcast with
passive activity losses andrental grouping elections and
that sort of stuff.
John Tripolsky (18:54):
Absolutely. Absolutely. So I know in the you
know, early on, one of the firstkind of supporting documents I
know we made with teaching taxflow, and this was probably
going back about a year, a yearand a half. You know, we laid
out all of the well, I think wecall it guidance chart. Right?
So we laid that out as far asfor a really kind of a cheat
sheet on entity types or Ishould say ownership types,
(19:16):
whatever, for rental properties.So do we wanna walk through all
these, kinda one one at a time?And some of them I know are very
simple. But then also too, and Iknow this is probably gonna come
up again. I know we talked abouta little bit too is I'll let you
do the answer for it.
But somebody that might belooking to getting their 1st
(19:37):
rental property or maybereassessing their situation.
Mhmm. Yeah. Absolutely. So l anLLC.
So LLC is with properties,though. I'll let you explain
what it really is and why theIRS does or doesn't care about
an LLC?
Chris Picciurro (19:51):
I mean, a a single member LLC is a
disregarded entity. So remember,you if you have a rental
property, it's gonna fall into 3buckets. The first bucket's
gonna be you own it personallyor you own it in a single member
LLC or you own it in a qualifiedjoint venture. I would say
that's gonna be the vastmajority of rental properties.
Then it goes on schedule e, partof your personal tax return.
(20:13):
Bucket 2 is gonna be that multimember LLC, your partnership
return, or s corp. Cringe everytime I think about rental
properties in an s corp. Thatgoes then those properties are
reported on form 8825 and go onyour partnership return. I know
we're getting really in theweeds in technical, so what I
want people to remember is workwith your tax professional to
(20:34):
make sure that you're gettingthe depreciation deduction and
make sure that each property isnot only identified as the
correct type, but the correctrental days, and each property
has its own line on those forms.And then finally, if you own a
rental property in a ccorporation, very rare, then
it's there's no separateschedule or form.
(20:54):
You just put the rental incomeon line 6 of the c corp and list
any deductions as normal on thec corporation tax return. That's
a form 11 20. I would say Imean, at least in my 20 years,
if I think about all theproperties, one out of every
1,000 properties are on a ccorporation tax return.
Very, very rare. Excellent. So,yeah, there's, obviously,
(21:15):
there's complexities withcertain situations and certain
setups, we should call it. But,hopefully, this, you know, gives
everybody a little bit of alittle bit of a background just
in the separation. Right, Chris?
John Tripolsky (21:29):
Yes.
Chris Picciurro (21:29):
And I would say if you are listening to this
podcast and you're newer to ourpodcast, definitely go back, and
I know we kid around about thethe, you know, the shameless
plugging. Listen to the podcaston step up basis. So if you are
listening to this and and you'rea tax pro or you're a taxpayer
John Tripolsky (21:45):
and you and you're working, in rental
properties and you realize theproperty was inherited by
someone, definitely think aboutthe step up in basis and and
make sure that that's accountedfor within that depreciation
deduction. Chris always saysyou're kinda pardon the
shameless plug. Not me. Nope. Iwill give the shameless plugs,
and they are completelyshameless.
So, yes, that episode, Chris,that that's actually a really
(22:06):
good one to mention too. If ifsomebody's not familiar what
step up in basis is, myselfincluded, honestly, even going
into that podcast, listen tothat. I won't say anything about
it, but listen to it, but youwill be absolutely floored on
the opportunities and benefitswith that. So, and then also to
looking at our podcast recordingroster, directly tied into
(22:28):
rental properties. Again, ifthis something that you're kind
of interested in, maybe youhaven't acquired your first
property yet.
You're thinking about it, kindof kicking the can a little bit.
I believe it's the end of June.We have a, an excellent topic on
why real estate is so popularwhen it comes to taxes with a
fantastic guest who if you'vedone any research online about
(22:51):
real estate investing, his namehas definitely come up. Won't
tell you who it is because Ilike dangling carrots. So hang
out for it.
Subscribe to the podcast. Checkus out online. We are happy to
obviously craft some content tohelp you in your real estate
investing journey. So as always,we will see you back here next
week, same time, different topicon the Teaching Tax Flow
(23:13):
podcast. Everyone, thanks forhanging out with us again here
on the podcast.
It's hard to believe that we'vedone this 82 times. That's 82
weeks. If you've listened to allof them, we commend you. You've
(23:36):
obviously been along for thepodcast journey that Chris and
myself have gone on. Yes.
We started this on a pizza box,which we're not ashamed of.
Lavalier mic and iPhone in apizza box. We said, hey, today's
the day we're gonna launch apodcast sitting at a dining room
or a living room table, sittingon a sofa in Panama City Beach,
Florida. So if we can do that,you as a taxpayer can take
(24:00):
advantage of some of thebenefits and opportunities that
are out there. So I know I soundlike a used car salesman, but
nothing against car sales.
But check it out. I mean, as wementioned in this podcast,
often, very often, you, the taxpayer, really are in control of
your tax situation, your taxbill per se. But it's, again, it
(24:21):
comes with responsibility. It'sup to you. You're in control of
it.
But that being said, you need tobe educated, be working with the
right team in place. We did agreat episode earlier on. Yes.
Another podcast plug aboutbuilding your board of
directors, personal board ofdirectors. So check that one
out.
Check out any of the topics wehave on here. If there's
anything you haven't heard yet,it's either already on the
(24:41):
schedule or we don't know thatyou're interested in it. So drop
us a line. If you have any ideasfor shows, you would love to
hear. We'd love to hear them aswell.
Disclaimer (24:48):
So thank you as always everybody and we will see
you back here very soon. Thecontent provided is for
educational purposes only. Weencourage you to seek
personalized investment advicefrom your financial
professional. For all tax andlegal advice, please consult
(25:10):
your CPA or attorney. Investmentadvisory services are offered
through Cabin Advisors, aregistered investment adviser.
Securities are offered throughCabin Securities, a registered
broker dealer. The content ofthis podcast does not constitute
an offer of securities.Offerings can only be made
through an offering memorandum,and you should carefully examine
the risk factors and otherinformation contained in the
(25:30):
memorandum.
Welcome to the Teaching Tax Flow podcast,
where the goal is to empower andeducate you to legally and
ethically minimize taxes paidover your lifetime. Welcome back
to the teaching tax flowpodcast, everybody. Episode 82,
we are jumping into how rentalproperties are taxed and maybe
(00:26):
other non taxed. We'll see howit goes. But before that, let's
take a brief moment as alwaysand thank our episode sponsor.
Ad Read (00:35):
This podcast is sponsored by Reps Tracker. Are
you a real estate investor whois bogged down with the huge tax
burden? Real estate investingcan open the door to powerful
tax benefits. Reps Tracker canstreamline the process of
accelerating theseopportunities. To take advantage
of a special TTF communitydiscount, go to teaching tax
flow.com backslashreps, r e p s,and use the code, I f g.
(00:58):
Better yet, click on the linkbelow in this episode's show
notes to go directly to therep's tracker sign up page.
John Tripolsky (01:07):
Welcome back everybody. Today, as mentioned
in the intro, we are gonna lookat rental properties and how
they're taxed. So a lot ofpeople have this idea, right,
of, oh, I wanna own all theseproperties, these houses. I
wanna be a landlord. You hear alot.
Right? But how familiar are youand others with how that
(01:27):
actually relates to your taxsituation? So as I always like
to poke fun at, but nothing'srolling off the tongue today, so
we just bring them back on hereanyways. Chris Pacquero, the man
with the answers, the tax guy.What's happening?
Chris Picciurro (01:42):
How are you today, Johnny t? Oh, I'm feeling
taxi.
John Tripolsky (01:46):
Feeling very taxi today.
Chris Picciurro (01:47):
Lord, have mercy.
John Tripolsky (01:49):
Here we go. But
Chris Picciurro (01:51):
I'm not feeling so taxi. I feel I feel good. I
feel, excited to talk about howrental properties are taxed.
Obviously, there's some there'ssome wrinkles, so we're gonna be
talking about the 99%situations. And you're right.
John Tripolsky (02:04):
Some a lot of people become landlords,
property owners. Landlord'skinda one of those terms that,
it's not too PC anymore, butinvestors or what have you. It
it
felt weird saying it. Honestly,like, it didn't feel right. I
said landlord. I thought, well,you know, like, I kinda nestled
down in my chair a little bitwhen I
Chris Picciurro (02:25):
saw that. That's okay. And some people
become property owners, rentalproperty owners. Purposely,
sometimes we have an accidentallandlord or meaning, hey. You
lived in a primary residence.
You had an unexpected jobchange. You you don't wanna sell
the property, you think you'llbe back, or maybe you're in the
military and you overseas for awhile, so you rent your property
(02:46):
out when you're out of town orliving
John Tripolsky (02:49):
somewhere. Hey, well, that's how Chris, you know
that, you know, this story alittle bit more. That's how I,
got into the Airbnb game about13 years ago. Right? I didn't
even have any pictures on thatlisting.
It's like, what in the world didI just do? I had no idea what I
was doing, but figured it out.So thank god for people like
you. You can, you know, makesense of the muddy waters when
sometimes people don't know. Butthen also what we're gonna talk
(03:11):
about here too, Chris, are wegonna look at anything between
long term and short termrentals, or are we just kinda
kinda putting them all together?
We're gonna put them alltogether. I'm willing to say
this. There is something and wehad another episode on the short
term rental loophole. There is a1 to 2% situation where you are
providing substantial services,according to the IRS, for your
(03:35):
short term rental property. Thatis extremely rare.
If that's the case, what we'regonna talk about today does not
pertain to you. We're gonna betalking about the 99.9%
Chris Picciurro (03:45):
of all rental property situation, how rental
properties are taxed and how youreport them on your tax return.
We talk, John, a lot about taxagencies being your involuntary
business partner. In teachingtax law, we talk about that tax
laws are written to encourageand discourage certain behavior.
(04:08):
We also have an episode that notall income is taxed to the same,
shameless plug. I
John Tripolsky (04:13):
think it
Chris Picciurro (04:13):
was, like, one of the first 10. I don't know.
John Tripolsky (04:15):
Yeah. Go, yeah, go back and listen to those.
That's when our auto audioquality was subpar. We were just
so excited to talk about thosethings. But
Chris Picciurro (04:23):
Well, when you when you launch a podcast on a
pizza abused pizza box, what doyou expect?
John Tripolsky (04:29):
Disclaimer but not a disclaimer. Yes. That
really did happen. And thatyeah. Go back and listen to some
other episodes, and maybe youcan maybe There There you go.
Yeah. We'll send you a gift cardfor Domino's.
Chris Picciurro (04:47):
So why being a property owner, a rental
property owner is attractive? Isthat the first thing I wanna
talk about when you're reportinghow how this income is reported
is that you are paying tax onyour net income. Now there are a
lot of rules, what are calledpassive activity loss rules, and
there are situations where onpaper, you can have a loss from
(05:07):
a rental property that actuallyoffsets other types of income.
But the the thing you have toremember is you're paying tax on
your net income and not yourgross income when it comes to
owning rental property. So youreport your rents collected, and
you get to deduct all of theordinary and necessary business
(05:30):
expenses for a rental propertyowner.
Those are gonna be your mortgageinterest, association dues,
property taxes, potentiallyproperty management fees,
repairs, maintenance, all ofthose common type of
expenditures.
John Tripolsky (05:45):
Not your dog food if you're a freelance
graphic designer?
Chris Picciurro (05:50):
No. No. Not in your crate, John.
John Tripolsky (05:53):
Because I'm looking at a birthday card here
from my daughter from a coupleweeks ago that literally says
happy birthday, dad, and it hasa giant donkey on it. So I don't
know if she's calling me ajackass already or what the deal
is, but animals. Actually,there's a lot on lot on that
topic too when we talked about,10 90 nines and dogs. So
Absolutely.
Chris Picciurro (06:12):
I mean, there are rare cases where I you could
deduct the dog food. If, if youown, like, a junkyard or a
scrapyard and in a area that's,let's just say, not the best
area and you have pit bulls thatlive there and they're and they
are used for security purposesonly, they're not personal pets,
(06:33):
they actually live outside, thenthat could be a deduction
potentially. But we're talkingabout rental real estate today.
The other deduction you get isdepreciation. Now we talked a
little bit about depreciationwhen we had our did our cost
segregation study, podcast, butwhat depreciation is is it can
be a confusing term fortaxpayers.
(06:55):
Because when you buy a property,why are you buying a property?
So it appreciates. So it goes upin value. So depreciation is
just a condensed term, that weuse to describe the cost
recovery of that property. So,for instance, John, if you
bought a rental property that isworth for $200,000, let's assume
(07:16):
$40,000 of that property isallocated to land.
You wanna look at those propertytax records to determine that.
And $160,000 of that property isallocated to the building
portion. You depreciate thebuilding portion, meaning you
get to deduct that. And onresidential property, that's
over a 27 and a half yearperiod. Commercial property, 39
years.
(07:36):
The point is, even though theproperty is going up in value,
if you have a mortgage or don'thave a mortgage, you still get
the depreciation deduction, andthat deduction can offset your
rental income. So the firstthing to remember when you're
reporting rental property, yourtakeaway from this piece, I get
to pay tax on my net income, notmy gross income. So that's a
(07:58):
win. Now most people own rentalproperty in individually or in a
single member LLC. Shamelessplug for episode 2, actually
don't listen to it because youwould probably cringe.
John Tripolsky (08:15):
Although that's one of our most popular ones, it
still holds the number one spotfor the most popular, I think,
for two reasons. Right? One ofthem, I think, is I purposely
tried to get you all fired up onit because you as a tax pro.
Right? Like and we'll get intothis, I'm sure, is maybe some of
the, we'll call it a disillusionmaybe with, LLCs.
But then also, yeah, that wouldI mean, this is a great topic.
(08:37):
And, again, looking at ourroster here for the upcoming
month, month and a half, we'reactually gonna revisit that one.
So shameless plug to subscribeto the podcast. Yes. Please do.
But if you own the propertyindividually or if you own it in
Chris Picciurro (08:52):
a single member LLC or what's called a qualified
joint venture with a spouse,that property is reported on
what's called a Schedule E.Schedule e is just attached to,
in this case, your personal taxreturn. And the schedule e just
really breaks down many thingsabout the property. Now many
(09:14):
most people are focused on am Ireporting the proper amount of
income, am I reporting theproper amount of deductions, but
there are other things the IRSis very, very interested in. And
not only is the IRS interestedin when we're talking about
rental property reporting forthat individual or single member
LLC that that is a that'sreporting on schedule e, Lenders
(09:36):
are very, very interested inwhat's on this.
Underwriters. In fact, ourfriend of the show, Brenna Carls
from The Mortgage Shop, talks alot about understanding there
are things on your Schedule Ethat play a role in your
lendability that you're not eventhinking of. So let me explain
that, John. On schedule e, youhave to identify each property
(10:01):
separately. So every if you own10 properties, you have 10
different entries on schedule e.
Each schedule e, you could putup to 3 properties on. You want
the the physical address of theproperty has to go on the form.
But also property type. So youhave to tell the IRS, is this a
single family home? Is it amultifamily home?
Is it commercial? Is it a selfrental? Is it a short term or
(10:23):
vacation rental? That's very,very important. Or is it just
land?
Because if you have land andyou're getting taking a
depreciation deduction,shameless plug to our to our
previous podcast. We're gonna doa lot of shameless plugs today
on the IRS data book. Your yourexamination percentage is
probably a lot higher than wejust talked about last episode.
(10:44):
So that's a factor because ifyou're going through
underwriting and you're tryingto add your portfolio, the type
of property plays a role. Also,you have to report fair rental
days versus personal use days.
So we see this sometimes wheresomeone is is lazy or some a tax
professional is lazy or thesoftware just defaults, where
you may have bought a property.Let me give you an example. You
(11:05):
bought a property in October.You placed it in the service,
you report the rental income. Onyour tax form, you write and you
put down that you owned it.
There was 365 for your rentaldays. What's the problem? An
underwriter is gonna say, well,if this property produced
$15,000 worth of revenue in allyear, that's not very good when
our debt service is a lothigher. But if the underwriter
(11:27):
or bank says, oh, okay. You onlyowned it for 90 days and it
produced $15,000, then they cansurmise that it might produce
$60,000 a year.
So my point is when you'rereporting on schedule e, we
talked about those technicalparts about about it previously.
Make sure that you properlyreport the fair market rental
days, the personal use days inthe property type. And here's a
(11:51):
here's a dumb guy question, youknow, from me as I always try to
John Tripolsky (11:54):
have one of them or I try not to have them, but I
do. So I'm actually looking at aSchedule e here in front of me.
Right? And and the lines, youknow, where it comes to, you
know, listing each of thephysical addresses for each
property, so up to 3. You havethose columns, fair rental or,
fair rental days, personal usedays.
And then there's a little columnwith some checkbox. It looks
like it's QJV. What what exactlyis QJV? There are
Chris Picciurro (12:17):
a couple checkboxes that you have to be
keenly aware of. QJV isqualified joint venture. So if
you live in a community propertystate and you and your spouse
form a limited liability companyor an LLC, and you put the
property in the LLC or apartnership, let's say, in
(12:38):
general, you would have to filea partnership tax return, and
those returns on average arestart at $2,000 a year to have
those prepared. And then youissue k ones, we're gonna talk
about that in a moment, but yourlet's just put it this way. Then
your tax compliance is a lot alot more arduous.
So instead of having to gothrough the process of filing a
(12:58):
partnership return, if youqualify, then you report to the
IRS, hey. This is a qualifiedjoint venture owned by both
spouses on this tax return.That's why IRS I'm not filing a
partnership return for thisproperty. The other box is oh,
great great. John, I'm so proudof you
John Tripolsky (13:15):
for looking at the schedule e. Hey. You know,
every are
Chris Picciurro (13:17):
you are you gonna go to the eye doctor,
like, crazy?
John Tripolsky (13:19):
In a while. Have eyes bleeding. You know, it's
yeah. I kinda I closed one eyeand kinda looked at it, like,
see what what this thing isright here. You know, I hear
schedule, and it reminds me of,you know, high school and
college days where I didn't likeit.
You know? Because kind of it
Chris Picciurro (13:32):
yeah. I know you're a loose cannon, John. You
don't like you're you're you'reyou don't like having a having a
a schedule. Although you youreally don't like when people
are late, and I love that aboutyou. That's one of your big pet
peeves.
John Tripolsky (13:43):
Drives me nuts. I won't mention you know, let's
not get off topic, but now yougot me all flustered up. It's
kinda like when everybody, saysthat I'm a was it a 10.99
employee? It's kinda what yousaid about that. So I know I
know that gets you fired up.
10. It's a yeah. Good segue,though, because
Chris Picciurro (14:01):
the last question that is on the form is
did you make payments that youshould issue a 10.99 on? So if
you're a rental property owner,the IRS now says, hey. Should
you have issued 10.90 nines?It's a really funny question,
and you either say yes or no,and then they ask you, if yes,
wait, did you make any paymentsthat would require you to file a
10.99? Yes or no?
(14:22):
Let's say I say yes. Hey. If yousaid yes, did you file them? I'd
rather see a taxider wheresomeone said, yeah. I did I did
make payments for the 10.99,but, yes, screw you.
I'm not filing 1.
John Tripolsky (14:32):
What you know, one day, Chris, we're we're
gonna put the call out there. Ifsomebody has so much money that
they don't know any don't knowany better way you know, thing
to spend it on except pay finesto the IRS, We should try to,
you know, find that person andjust try to, you know, muck with
the IRS as much as we can bycontradicting answers and, you
(14:53):
know, timing how long it takesto get an audit. So if anybody
wants to
Chris Picciurro (14:56):
do that, I'm sure we can blush. Well, let's
move on to the second popularfact pattern when you own
property.
John Tripolsky (15:05):
Assume the property I like how you
completely, like, kick my my BScomment to the side. You're
like, no. I don't wanna workwith that person. No. I want
nothing to do with
Chris Picciurro (15:13):
No. Heck no. And and the people in teaching
tax law community appreciatethat, the other tax
professionals. The motherfuckingOh, anyways.
John Tripolsky (15:20):
Well, you know, back to a regularly scheduled
program.
Chris Picciurro (15:23):
I didn't even acknowledge pivot redirect. I
just pivoted and redirected onthat one. So that was that's
just the way it goes. So whiletime let's assume let's talk
about reporting for someone thathas either a multi member LLC
taxed as a partnership or is apartnership or, oh, gosh, is an
s corporation, which is gonnamake our our tax professional
(15:45):
friends cringe when you haverental property in the s corp,
but we're not gonna get upset.But let's assume you own rental
property in one of those threetypes of entities.
The multi member LLC and thepartnership, that is reported on
a form 1065, an s corp reportedon an 11 an 1120. Yes. There are
(16:06):
episodes in the podcast aboutthese forms. Regardless of if
you're an s corp or taxed as apartnership, the rental
activity, other than being onthe balance sheet, is reported
on a form 8825. I wonder I wannabe the person at the IRS that
gets to number these forms.
(16:26):
Like, wow. Very into, like, ah,we don't have we need a new one
in the 800. I'm sure there's amethod to their madness, but,
like, 88 you know, shoot. Wewe've got a gap. Let's just call
it form 422 or something.
Right.
John Tripolsky (16:41):
Yeah. Because I highly doubt they have, you
know, 9 1,000 forms.
Chris Picciurro (16:44):
It feels like it sometimes, but I really mean.
So the 8825, it really sets upsimilarly to the schedule e. But
this is so, you know, you haveto report the fair market days,
the personal use days, what typeof property, the physical
address of the property, grossrent, and then your rental real
estate expenses includingdepreciation. Each Form 8825 has
(17:09):
the has the capacity for 4rental properties to be reported
on it, whereas schedule e onlyhas 3. So if you have 12
properties, not a big deal.
I mean, we can shoot on ourprivate CEP practice, we've got
clients with over 200properties, and we have, you
know, 50 form 8825s attached tothe partnership return or per so
that that happens. But, so the8825, again, make sure you take
(17:32):
your depreciation deduction. Thedifference on the partnership
and s corp return is that youhave to you have to report the
balance sheet, which would meanyour any mortgage amount, any,
asset amount, for the, for theentity. So so, yeah, very
similar. And the takeaway hereis, remember, each property
(17:57):
should be reported separately.
Now there are some exceptions tothat. An exception might be,
like, an apartment complex or anapartment building that has 20
units in it. You're not gonnaput each unit separately. That
apartment is its own, you know,physical address. Or if you have
a duplex, you know, duplex withmultiple addresses, like, it
(18:19):
could be 110 dash 112 MainStreet could go on one line.
So make sure, you know, becausebecause it gets really muddy and
the IRS doesn't like this andnor do banks. And I've seen it,
unfortunately, where I see someI see someone that has 8 rental
properties and they put it allon one line of their Schedule E
and they just slap in theirrental property portfolio.
(18:42):
That's that's not a good look,John. Nope. It's not not a good
look.
John Tripolsky (18:46):
So I can and I can see exactly why.
Chris Picciurro (18:48):
For that. Like, that go beyond this podcast with
passive activity losses andrental grouping elections and
that sort of stuff.
John Tripolsky (18:54):
Absolutely. Absolutely. So I know in the you
know, early on, one of the firstkind of supporting documents I
know we made with teaching taxflow, and this was probably
going back about a year, a yearand a half. You know, we laid
out all of the well, I think wecall it guidance chart. Right?
So we laid that out as far asfor a really kind of a cheat
sheet on entity types or Ishould say ownership types,
(19:16):
whatever, for rental properties.So do we wanna walk through all
these, kinda one one at a time?And some of them I know are very
simple. But then also too, and Iknow this is probably gonna come
up again. I know we talked abouta little bit too is I'll let you
do the answer for it.
But somebody that might belooking to getting their 1st
(19:37):
rental property or maybereassessing their situation.
Mhmm. Yeah. Absolutely. So l anLLC.
So LLC is with properties,though. I'll let you explain
what it really is and why theIRS does or doesn't care about
an LLC?
Chris Picciurro (19:51):
I mean, a a single member LLC is a
disregarded entity. So remember,you if you have a rental
property, it's gonna fall into 3buckets. The first bucket's
gonna be you own it personallyor you own it in a single member
LLC or you own it in a qualifiedjoint venture. I would say
that's gonna be the vastmajority of rental properties.
Then it goes on schedule e, partof your personal tax return.
(20:13):
Bucket 2 is gonna be that multimember LLC, your partnership
return, or s corp. Cringe everytime I think about rental
properties in an s corp. Thatgoes then those properties are
reported on form 8825 and go onyour partnership return. I know
we're getting really in theweeds in technical, so what I
want people to remember is workwith your tax professional to
(20:34):
make sure that you're gettingthe depreciation deduction and
make sure that each property isnot only identified as the
correct type, but the correctrental days, and each property
has its own line on those forms.And then finally, if you own a
rental property in a ccorporation, very rare, then
it's there's no separateschedule or form.
(20:54):
You just put the rental incomeon line 6 of the c corp and list
any deductions as normal on thec corporation tax return. That's
a form 11 20. I would say Imean, at least in my 20 years,
if I think about all theproperties, one out of every
1,000 properties are on a ccorporation tax return.
Very, very rare. Excellent. So,yeah, there's, obviously,
(21:15):
there's complexities withcertain situations and certain
setups, we should call it. But,hopefully, this, you know, gives
everybody a little bit of alittle bit of a background just
in the separation. Right, Chris?
John Tripolsky (21:29):
Yes.
Chris Picciurro (21:29):
And I would say if you are listening to this
podcast and you're newer to ourpodcast, definitely go back, and
I know we kid around about thethe, you know, the shameless
plugging. Listen to the podcaston step up basis. So if you are
listening to this and and you'rea tax pro or you're a taxpayer
John Tripolsky (21:45):
and you and you're working, in rental
properties and you realize theproperty was inherited by
someone, definitely think aboutthe step up in basis and and
make sure that that's accountedfor within that depreciation
deduction. Chris always saysyou're kinda pardon the
shameless plug. Not me. Nope. Iwill give the shameless plugs,
and they are completelyshameless.
So, yes, that episode, Chris,that that's actually a really
(22:06):
good one to mention too. If ifsomebody's not familiar what
step up in basis is, myselfincluded, honestly, even going
into that podcast, listen tothat. I won't say anything about
it, but listen to it, but youwill be absolutely floored on
the opportunities and benefitswith that. So, and then also to
looking at our podcast recordingroster, directly tied into
(22:28):
rental properties. Again, ifthis something that you're kind
of interested in, maybe youhaven't acquired your first
property yet.
You're thinking about it, kindof kicking the can a little bit.
I believe it's the end of June.We have a, an excellent topic on
why real estate is so popularwhen it comes to taxes with a
fantastic guest who if you'vedone any research online about
(22:51):
real estate investing, his namehas definitely come up. Won't
tell you who it is because Ilike dangling carrots. So hang
out for it.
Subscribe to the podcast. Checkus out online. We are happy to
obviously craft some content tohelp you in your real estate
investing journey. So as always,we will see you back here next
week, same time, different topicon the Teaching Tax Flow
(23:13):
podcast. Everyone, thanks forhanging out with us again here
on the podcast.
It's hard to believe that we'vedone this 82 times. That's 82
weeks. If you've listened to allof them, we commend you. You've
(23:36):
obviously been along for thepodcast journey that Chris and
myself have gone on. Yes.
We started this on a pizza box,which we're not ashamed of.
Lavalier mic and iPhone in apizza box. We said, hey, today's
the day we're gonna launch apodcast sitting at a dining room
or a living room table, sittingon a sofa in Panama City Beach,
Florida. So if we can do that,you as a taxpayer can take
(24:00):
advantage of some of thebenefits and opportunities that
are out there. So I know I soundlike a used car salesman, but
nothing against car sales.
But check it out. I mean, as wementioned in this podcast,
often, very often, you, the taxpayer, really are in control of
your tax situation, your taxbill per se. But it's, again, it
(24:21):
comes with responsibility. It'sup to you. You're in control of
it.
But that being said, you need tobe educated, be working with the
right team in place. We did agreat episode earlier on. Yes.
Another podcast plug aboutbuilding your board of
directors, personal board ofdirectors. So check that one
out.
Check out any of the topics wehave on here. If there's
anything you haven't heard yet,it's either already on the
(24:41):
schedule or we don't know thatyou're interested in it. So drop
us a line. If you have any ideasfor shows, you would love to
hear. We'd love to hear them aswell.
Disclaimer (24:48):
So thank you as always everybody and we will see
you back here very soon. Thecontent provided is for
educational purposes only. Weencourage you to seek
personalized investment advicefrom your financial
professional. For all tax andlegal advice, please consult
(25:10):
your CPA or attorney. Investmentadvisory services are offered
through Cabin Advisors, aregistered investment adviser.
Securities are offered throughCabin Securities, a registered
broker dealer. The content ofthis podcast does not constitute
an offer of securities.Offerings can only be made
through an offering memorandum,and you should carefully examine
the risk factors and otherinformation contained in the
(25:30):
memorandum.
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