Rental Property

We recently spoke with Erik Sherman of the National Association of Realtors to discuss the biggest homeowner tax mistakes. Below is an except from the article.

6 Homeowner Tax Mistakes Accountants Say to Watch For
4. Understanding Rental Income

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A condominium is different from a house in many respects. For instance, condos typically do not have a yard or basement. Instead, condo owners share land, lobbies, elevators, stairs, pools, and other service areas. As such, owners generally pay dues or assessments to a special corporation that is organized to manage the common areas.

Are condo common area expenses deductible?

The short answer is that common area expenses are not deductible if the condo is being used as personal property. However, if the condominium association makes a capital improvement to the property, the owners can add their pro-rata share of the expense to their cost basis. It is important to save the supporting documentation detailing the nature of the improvement since it will be incorporated in your capital gains tax calculation when you eventually sell the condo.

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Question:
We purchased personal use foreign property in July 2012 for $300,000. On 1/1/14, the property was converted to rental use. It was rented out for three months in 2014. For purposes of setting up this rental property to calculate depreciation, should I use the exchange rate as of July 2012 or 1/1/14? Also, can you confirm that foreign rental property should be using ADS depreciation method with mid-month convention.

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We have suspended passive activity losses associated with our rental property. If we sell one of the rental properties, can we claim those losses?

The short answer is that it depends on a few factors. However, it’s likely that the suspended passive activity losses can be claimed as there will be a complete liquidation of the taxpayer’s entire interest in that single rental activity.

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There are many different types of real estate professionals in the market. Some do it for a living, while others manage one or two properties for supplemental income. The business tax deduction rules vary greatly depending on how you are classified as a real estate investor as detailed in IRS Publication 925.

To qualify as a real estate professional for tax purposes, you need to meet the following requirements:

• More than 50% of your professional services are provided in the real estate field
• You spend more than 750 hours each year in managing a real estate business
• You are not an employee of the business (unless you own at least 5% of the business)
• You must also materially participate in the rental activity

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