Denver Rental Real Estate Tax Prep Hints | Deductions for Denver real estate investment
Unless you spend at least 750 hours per year working as a real estate professional, any gains or losses on your rental will be considered non-material. What does this mean for your Denver Real Estate Tax Prep as a non-real estate professional? You will pay income tax on any gains, but your losses will be considered passive*. A passive loss can only offset passive income.
Let’s start with a definition:
Passive Activity: You receive a gain or loss from an activity in which you do NOT materially participate. If you have no responsibilities or activities related to your membership or ownership of a partnership or S-Corp, all gain and loss are passive. If you have rental property, but aren’t a real estate professional, all gains and losses are passive.
Now let’s look at an example.
You have a $6,000 loss on your rental for the year. You also received $10,000 income from a partnership you invested in but have no duties. Both are passive activities. In this case, the net taxable gain is $4,0000.
But what if you don’t have passive income? Your $6,000 loss will carry-forward into future tax years, until you have passive income to offset the loss. Say the following year, your rental has a $2,000 gain. Now you can use $2,000 of the prior loss and report zero income on the rental when doing your Rental Tax Preparation. The remaining $4,000 prior year passive loss will continue to carry-forward until you use it.
The Exception: You can take up to $25,000 of rental loss against your income each year your modified adjusted gross income is below $100,000.
HOW DOES DEPRECIATION FIT INTO MY DENVER REAL ESTATE TAX PREPARATION
Many people create a paper loss on their rental property by depreciating the building and improvements. Depreciation takes place over 27.5 years. The standard assumption is that without any maintenance, a building will have no value by year 27.5. Land is not depreciable.
DENVER REAL ESTATE IMPROVEMENTS VS. REPAIRS FOR TAX PREP
Improvements prolong life and add to the value of the structure. Kitchen and bath remodels are improvements. Improvements can only be expensed through depreciation. That new bathroom you put in is now part of the building, expensed by depreciated over 27.5 years. Repairs, by contrast, keep the property in good operating condition. Replacing a toilet that doesn’t work is a repair. Fixing a sewer line is a repair, while replacing a sewer line is an improvement. The easy way to remember this is that a repair is a fix, while an improvement is an upgrade.
Depreciation Warning: If you depreciate a rental property and then sell it, you may have to pay taxes on the prior depreciation you took. For example:
You purchase a property for $200,000. While it was a rental, you took $25,000 in depreciation. Because you took depreciation, your basis in the property is reduced to $175,000. This means that if you sell the building for $200,000 you will have a taxable gain of $25,000.