Yesterday, we spoke about gig workers and the self-employed.  But, there’s another sort of side job engaging many taxpayers.  Renting out the basement or acquiring and renting a second home.

This makes taxes far more complicated- even more so than a Schedule C self-employment.  Not just because Schedule E needs to be completed.  Because you probably also need Form 4562 (depreciation) to be computed.

(You’d be surprised how many folks think they don’t need to depreciate their rental home(s)- and then are stunned to find out the IRS calculates it anyway- even though you never took the deduction- so that when you sell the home, instead of a small profit, you have the cash from the sale of the home- plus the years of depreciation never taken.  Major capital gains problems!!!!)

Your rental income and expenses are transferred from your accounting system (you do have one, right?) to Schedule E, the form that covers rental business submitted to the IRS.

But, there’s also a new  question… Are you a real estate professional?  That means you need to spend 1/2 your time dealing with this business or that you can document you spent 750 hours a year running the enterprise.  If you can’t meet this criteria, you may find some of your deductions limited.  (Actually, the deductions are totaled and accrued forward until you sell the property.  Then, they are used to reduce any profits you gained from the sale.)  Oh- and that’s another reason you should have been using a tax professional like us- we know how to prepare you so this never becomes an issue again!

There’s also that one deduction item on the form that confounds many folks, that I mentioned above.  Depreciation.  (Residential real estate uses a straight 27.5 y depreciation-but the land the house sits on never depreciates. Commercial real estate uses a 39 y basis.)

You need to separate out the price of the residence from the total price of the property.  As stated directly above, land is not depreciated.   So, that $ 400,000 house you bought may only be $ 275,000 in “improvements”, with $ 125,000 apportioned to the land.  Which means that you get to deduct $10,000 a year in depreciation costs.  (Or not- if you are not a real estate professional, this deduction often means you had a tax loss on your rental property- and you can’t deduct much of the losses if you are not a professional.)

Oh, yeah.  That depreciation needs to be recorded on Form 4562.  Along with the depreciation on any new appliances you bought (they are not “repairs” or “supplies”, but capital items that require separate accounting.  And, that new roof?  It also has to be capitalized.  Often, this also includes the rugs you replaced…)

And, then, do you take straight depreciation?  Use Section 179?  Bonus Depreciation?  (By the way, the new law requires you to opt out of bonus depreciation, or it applies- even if you didn’t so record it.)

As you can see, this is a little more complicated than you thought.

You still have time to find that tax professional, though.

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