We regularly have clients ask us about the pros and cons of purchasing rental properties as ways to supplement their income and create long-term investments. Stagnant interest rates on investments and the current real-estate market has pushed many of our clients into this activity.
No matter what your reason for considering rental activities you will encounter a laundry list of potential pros and cons related to your taxes at the end of the year. This is by no means a complete list of the benefits and drawbacks of venturing into rental activities; being a CPA firm, we will focus only on the potential tax impact. Having a discussion with a Financial Advisor of alternative investments may help you identify if rentals are right for you.
If you aren’t a real estate professional there are some pitfalls to be aware of, rental activity is passive and has some loss deduction restrictions. Here are some high points regarding rentals.
- Positive cash flow with the potential to offset ordinary income. For most taxpayers, rental properties result in a taxable loss due to the depreciation deduction allowable.
- If your adjusted gross income (AGI) is lower than 100,000 per year up to 25,000 of losses can offset other ordinary income. Phasing out by AGI of $150,000
- Types of Deductions: Depreciation, operating expenses, property taxes, repairs and maintenance, utilities, professional fees, and others.
- Good long term investment opportunity
- Potential appreciation of property at date of sale.
- Passive losses accumulate and can offset gain on eventual sale of the property.
- Upon sale of the property any depreciation expense taken in prior year will convert a portion of your gain to a 25% capital gain rate.
- You can attempt to manage your tax liability by selling the property in years with lower income.
- Additional administrative responsibilities.
- You will need to maintain accurate records of income and expenses related to your rental property
- Based on preference, you may need to engage a property manager to perform rent collection, repairs, and reference checks for potential tenants.
We can help identify how your personal taxes would be impacted by investing in a rental property. Proper planning can mitigate year end surprises and potentially undesirable tax consequences.
Over the next few months you are going to be reading and hearing a lot about potential tax law changes that are being recommended by the new administration. The purpose of this article is to look into the future and determine what the tax landscape might look like by reviewing the tax proposals of President-Elect Donald Trump and also a tax proposals from Speaker of the House Paul Ryan.
Before we get into reviewing potential tax law changes, let’s step back and review the life cycle of a tax bill. The part of the government that deals with the introduction of all tax bills is the House of Representatives. All of the bills are drafted and reviewed by legislative committees to include the House Ways and Means Committee.
Once a bill has passed the House of Representatives, which requires majority vote, it is sent to the Senate for consideration. In the Senate the bill is reviewed by tax legislation and finance committees.
Once the billed has passed the Senate, which also requires a majority vote, it is sent to the President for his signature.
With tax law first being introduced by the House of Representatives, most observers feel that attention needs to be directed not only toward the Trump tax proposals but also those that have been put forth by Speaker of the House Ryan.
The best way to compare and contrast the tax polices of both President-Elect Trump (Revised Plan) and Speaker of the House Ryan is to put them side by side. Please see the attached chart, here.
As can be seen by the comparison, the following can be surmised with respect to potential tax law changes. The provisions below are where the Trump plan and the Ryan plan are in unison:
- Reduction in individual income tax rates
- Elimination of individual alternative minimum tax
- Elimination of estate tax and generation-skipping tax
- Elimination of the 3.8% medicare tax on net investment income
- Increased standard deductions
- Elimination of personal exemptions
- Cap on itemized deductions
- Reduction in corporate income tax rates
- Elimination of corporate alternative minimum tax
- Revised expensing rules (depreciation and interest expense) for businesses
- One-time tax on expatriated profits returned to the United States
It is not known the timing of any new tax legislation or what the effective dates would be, if enacted. Whatever lies ahead your advisors at BiggsKofford will keep you abreast of changes that will impact you and your business.
Gregory L. Gandy, CPA
Tax Director, BiggsKofford
Beginning on 1/1/17, the standard mileage rates for cars, vans, pickups, and panel trucks will be 53.5 cents per mile for business miles, 17 cents per mile for medical or moving purposes, and 14 cents per mile for charitable purposes. The business expense rate is down half a cent per mile from 2016, and the medical and moving expense rates are down two cents per mile from the 2016 rates. The charitable rate is set by law and remains unchanged from last year’s rate. The portion of the business standard mileage rate treated as depreciation is 23 cents per mile for 2013, 22 cents per mile for 2014, 24 cents per mile for 2015 and 2016, and 25 cents per mile for 2017. When computing the allowance under a Fixed and Variable Rate (FAVR) plan, the standard vehicle cost cannot exceed $27,900 for autos or $31,300 for trucks and vans. Notice 2016-79, 2016-52 IRB.
Qualified 529 plans are a great way to set money aside for future cost of college while saving money on your taxes; CollegeInvest and Scholars Choice are the two approved Colorado 529 plans that gain the subtraction on a Colorado state return. But, the contribution deadline for the 2016 tax year is approaching very quickly. Be sure to have all contributions in by December 31st or you won’t see the benefit on your 2016 return.
Moneys set aside in qualified 529 plans can now be used for more expenses. New legislation now allow funds to be used for computers and related equipment. This will included computers, printers, software, and internet access.
If you’re concerned about how to fund a child’s future college expenses, or you simply want to take advantage of the additional deduction 529 plans offer, now is the time to make contributions.
As the fury of filing deadlines slip away and the office begins settling into a slower pace there is only one logical thing to think about; next year’s filing deadlines. I know this may not be the most exciting thing to focus on, however there are a few changes for next year that should be noted now when taxes are still on our minds. If you file a Partnership, Report of Foreign Bank and Financial Accounts (FBAR), or C Corporation return filing deadlines have changed.
The 2016 tax year has the potential to catch many Partnerships off guard by changing the due dates from April 15th to March 15th. If partnerships are unable to assembly everything needed by this earlier date a six month extension will be available. To avoid any penalties be sure to mark your calendars now, talk with your CPA and be sure returns or extensions are submitted by the new due date.
FBAR returns have also been changed; going from June 30th to April 18th. A six month extension will be available. If you miss the deadline and you are a first time offender we may be able to abate any penalties, the IRS has been authorized to waive penalties for these individuals. This is by no means a reason to purposely ignore the deadline or put off filling an extension. Every attempt should be made to file in a timely matter instead of relying on the IRS to be kind hearted.
For 2016 C Corporations have been given an extra month to file their returns; for this year deadlines are April, 18th. A six month extension will also be available.
With April 15th falling on a Saturday in 2017, personal returns will be due April 18th.
Changes in filling deadlines have the possibility of catching many people off guard; including those who make every attempt to stay within the rules and regulations of the IRS. Don’t be caught off guard. Mark your calendars now to be sure to avoid a last minute rush.
Some medical professionals believe that by putting employees on salaries they won’t have to pay overtime. This has not been true for decades, and a new overtime rule adds teeth to Department of Labor regulations. To learn more about their findings, click here.
A federal district court judge on November 22nd issued a nationwide injunction blocking the new overtime rules that were to go into effect on 12/1/2016. The injunction is temporary in order to give the judge time to consider a permanent ruling. Any ruling would be subject to appeal. We have linked an article here that provides more information.
Beginning Thursday, December 1st 2016 the Department of Labor’s rules regarding overtime are changing. If you have employees making less than $913 a week or $47,476 you will now be required to pay them overtime. Are you ready for the change? See the Article below form ADP for more information.