Real estate has long been considered one of the greatest long-term investments. Further, with the trend of minimalist living, many are turning their primary residences into rental properties. While converting your home to a rental property comes with passive income and tax benefits, it’s important to note the tax implications as well.
Benefits of Converting Your Primary Residence to a Rental Property
Passive income is just one of the benefits of converting your home into rental property, but there are plenty of others.
Tax Deductions
Deducting the expenses related to your rental property can decrease the income reported on your tax return. Every property is different, but the most common expenses you can deduct include:
Cleaning and maintenance
Property taxes
Commission fees
Repairs
Insurance
Mortgage interest
Depreciation Expenses
The IRS allows you to depreciate your rental property over a 27.5-year period in order to account for things like wear and tear and deterioration. Taxpayers can do this by taking the value of their home at the time of conversion, less the land value, and then dividing it by 27.5 years to calculate the annual depreciation expense. If your depreciation expense is greater than your rental income in a given year, no taxes are owed on the income.
Tax Impact of Selling a Rental Property
While the benefits sound nice, it is critical to understand the tax implications that come with not only owning a rental property, but also those that accompany selling one.
Capital Gains
In the selling process, timing is everything because it will determine the amount of capital gains tax paid, if any. Capital gains tax is tax owed on the profit earned on an asset upon selling it. It can be found by a simple calculation:
Final Sale Price – (Asset’s Original Cost + Expenses Incurred)
The IRS Section 121 exclusion allows taxpayers to exclude up to $250,000 of the gain from the sale of your rental property. The amount increases to $500,000 if married filing jointly. To qualify, the taxpayer must own and use the property as their primary residence for two of the past five years. If a taxpayer sells their residence during a time of using the property as their primary residence for only one of the past five years, they would no longer be eligible for the Section 121 exclusion. In this case, the taxpayer would need to report the gain of the sale in their taxable income.
Tax Debt Relief for Rental Property Owners
Tax implications revolving real estate can be extremely tricky. If you’re planning on converting your home to a rental property, it’s important to make sure you are keeping track of all rental property expenses and income to ensure accurate reporting during tax time. If you need tax help, give us a call at 800-536-0734 for a free consultation.
Renting out your property as an Airbnb can be a good way to secure residual income. While Airbnb may send you a tax form at the end of the year. It’s important to understand your tax responsibilities to check for errors and in the event you aren’t issued a form.
Reporting Airbnb or Vacation Rental Income
The IRS requires that all payment processing companies report gross earnings for all users within the US. Companies like this include Venmo, PayPal, Airbnb, Etsy, and others. Airbnb will issue Form 1099-K if you meet certain income thresholds. Non-US citizens will be provided Form W-8. However, you still must report the income if you do not receive this form.
Withholding taxes from Airbnb payouts
You do have the option to withhold taxes from your Airbnb earnings. This is particularly recommended to avoid a large tax bill at the end of the year. You can also use a tax calculator to get an estimate of your earnings to save money for taxes.
Vacation Home, Rental, or Personal Use
You’ll need to determine whether your Airbnb property falls under the category of a vacation home, rental property, or personal use. This depends on several factors. One is how you use the property. Another is how often you rent it out. Finally, your intentions with the property are also considered.
Vacation Home
If you primarily use the property for personal vacations and occasionally rent it out to cover expenses or generate additional income, it might be considered a vacation home. Typically, vacation homes are used by the owner for personal enjoyment and rented out to others on a short-term basis.
Rental Property
What if your primary purpose for owning the property is to generate rental income? If you rent it out consistently throughout the year, it’s likely considered a rental property. In short, rental properties are typically managed as investment properties with the primary goal of generating rental income.
Personal Use
If you use the property exclusively for personal purposes and do not rent it out to others, it would be considered for personal use only. This could also include using the property as a second home for personal vacations. However, there is something called the Augusta Rule, also known as the “14-day rule.” This is a provision that allows homeowners to rent out their primary residence for up to 14 days each year without having to report the rental income on their tax return. The IRS requires you to pay taxes rental income for 15 days or more out of the year.
Tax Relief and Filing Assistance for Airbnb Hosts
As a host, you may qualify for tax relief. Our tax professionals will review your case to determine the best course of action for your compliance. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers.
The world of investments can be intimidating, especially for young adults and college students. However, it is known that one of the best ways to build long-term wealth is to start investing early. Doing will allow your money to compound interest for a longer period of time. More than anything, knowing investment tips will help you get started.
Invest in a High-Yield Savings Account
This investment tip is great for those who are just getting started and may be hesitant to try stock trading. Like a traditional savings account, a high-yield savings account pays interest on your account balance. The main difference is that the rates of a high-yield savings account are far higher than those of a traditional account. In fact, the rates are 20-25 times the national average of traditional accounts. This investment is ideal for building an emergency fund or safety net. It is money that is not meant to be touched but is still easily accessible when needed.
Open an Individual Retirement Account (IRA)
College days may seem early to begin thinking about retirement, but the sooner you start saving the better. One of the best ways to begin retirement savings is through an IRA account.
Traditional IRA accounts allow tax-deductible contributions on state and federal tax returns for the year the contribution was made. When you withdraw the money for retirement (beginning at 59 ½ years old), you will be taxed at that income tax rate. This is important to consider as some people will be in a higher tax bracket when they retire because of Social Security benefits, investment income, and more.
Roth IRAs are usually more popular with young adults because the earnings and contributions to the account compound tax-free. In other words, you pay taxes on the money before you contribute so you don’t have to pay it later. However, your contributions do not qualify as tax deductions. This option is also better for those who anticipate being in a higher tax bracket at retirement age.
Invest with a Robo-Advisor
This investment tip is ideal for those who want to invest through a brokerage account for cheap without doing a ton of research. Robo-advisors use artificial intelligence to create one-of-a-kind investment portfolios based on your goals. These goals are determined by amount of time left before retirement and risk level. This option usually does not require paying fees for small accounts, so there is not much risk involved in getting started. However, you may be required to pay a small percentage of your assets each year once you reach a certain account balance.
Tax Relief for Investors
The best investment tip is to always ensure you are compliant with tax laws and to report your investment earnings each year. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
There is no shame in needing professional help during tax season. In fact, if you’re able to afford tax assistance or find community resources, you’ll have a better likelihood of accurate returns. Getting your return completed correctly the first time means fewer delays and getting your refund faster. Choosing the wrong tax professional, however, could hurt you in the long run. The IRS has shared several tips for choosing a tax professional.
Certified public accountants are licensed by state boards of accountancy in the District of Columbia and U.S. territories. They must pass the Uniform CPA Examination and have completed a study in accounting at a college level. To maintain an active CPA license, it is required that a CPA completes specified levels of continued education.
Tax attorneys are licensed by state courts, the District of Columbia, or designees such as the state bar. If you’re considering hiring an attorney specializing in tax prep, they should still have a degree in law and passed a bar exam.
Tax Professional History
Conducting your own research is crucial to choosing a tax professional. Sources such as the Better Business Bureau can give you some history on the professional that you’re considering. Notable things in their background would be disciplinary actions and the status of their license. The State Board of Accountancy is used for CPAs, the State Bar Association for attorneys, and the IRS verifies enrolled agent status here.
Service Fees for Tax Professionals
The goal of the tax preparer should not be larger refunds than their competitors. Tax preparers that charge by taking a percentage of your refund may not have your best interest in mind. More money sounds great at first, but compliance with the IRS is the ultimate goal. You want to be sure that the tax pro is not using deductions you don’t qualify for, or other means to increase your refund and make more money.
There is never a reason to show your personal documents or Social Security number to a tax preparer when you’re asking about a quote.
Book a Tax Professional Early
You don’t want to wait until the last minute to find a tax professional. As soon as the tax season ends, it’s a good idea to contact a tax preparer for next year. Fly-by-night preparers are high risk investments.
Providing Documentation
Keep records and receipts handy for filing season. This will make the tax preparer’s job a lot easier, and increase the likelihood of accuracy for your return. A good tax preparer should ask questions to figure out your total income and tax deductions, or credits.
Blank Tax Returns, Signing, and Filing
You should never sign a blank tax form, even if the preparer sent it to you. Always review your return thoroughly and ask questions if you’re confused. This is important, you want to make sure the refund is going directly to you, and not through the preparer. They should also provide you with a copy of the completed return.
You also want to make sure that your tax professional e-files your return. Filing electronically and choosing direct deposit is the quickest way for you to get your refund.
Preparer Tax Identification Number
All paid tax preparers must sign returns and include their PTIN, or Preparer Tax Identification Number by law. If your preparer does not have a PTIN, do not move forward with their paid services.
Optima’s Tax Services
Now that you know these tips for choosing a tax professional, you can get help. Optima Tax Relief has a team of dedicated and experienced tax professionals with proven track records of success.
While taxes are inevitable, you want to make sure that you’re not paying more than you have to. You can legally reduce your taxes by using strategies that you may not be aware of. Here are some tax reduction strategies from Optima Tax Relief.
Retirement Contribution
A simple way to reduce your taxes is by making retirement account contributions. You can make these contributions to any traditional IRA until the filing deadline in April. The amount you owe in federal taxes will be reduced as a result of 401(k) and IRA accounts being deducted from your taxable income.
If you have a Roth IRA, it’s funded with after-tax dollars. This doesn’t equate to a tax deduction, but the money in the account is tax-free even in retirement.
Deferring Income
By deferring your income, such as year-end bonuses, you can reduce your tax burden for the year. The amount of taxes reduced depends on the amount contributed over the year.
While you are able to defer wage and salary, it’s often more difficult for taxpayers to do so. It’s in your best interest to defer income if you will remain in the same tax bracket or lower the following year. This is to prevent a larger tax bill in the future. If you believe you will be in a higher tax bracket next year, you can accelerate income so that you can pay it on a lower bracket now, than a higher bracket later.
Deductions for Military Members
Being a member of the military reserves and traveling more than 100 miles from home qualifies you for a deduction for unreimbursed travel expenses. Eligible military expenses include transportation, meals, and lodging.
As an active-duty service member, moving costs for permanent station changes can be deducted.
Flex Plans
Flexible spending accounts are fringe benefits offered by employers to steer part of your pay into a special account. This account can be used to pay bills for childcare and medical expenses.
The money in flex accounts is free of income and Social Security taxes. However, there is a use-it-or-lose-it rule that can forfeit the excess money that isn’t used by the end of the year.
Is there a way to reduce tax debt?
Now that you know some tax reduction strategies, you may be able to put these into practice. Tax relief is available, and can come in different forms for eligible cases. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
Employees are usually reimbursed for work-related expenses. When you file or report these expenses, it’s important to make sure the numbers are as accurate as possible. Over-claiming expenses, turning in receipts for unused items, or even spending more than the allowed amount are common expense fraud offenses. Whether you’re an employer or employee, it’s important to understand what can be determined as reimbursement fraud to avoid mistakes and spot schemes as they occur.
What are examples of expense and reimbursement fraud?
A typo or honest mistake can be fixed, but ongoing fraudulent numbers can significantly hurt a company over time. Actual expense fraud is deliberate and usually a premediated attempt to inflate reimbursements. See some examples below:
Claims for items that weren’t purchased (office supplies, lunches, etc.)
Bills for canceled trips, such as hotel costs and travel tickets.
Bills for non-reimbursable expenses (anything that isn’t work-related or is done in leisure)
Separate mileage bills from employees who travel together
Inflated totals for any of the above expenses. For example, if an employee were to take a trip that costs $415.00, but the employee rounds up to $420.00 on the bill. This would be an act of expense fraud.
Employees often don’t associate these acts with fraud because the word “fraud” sounds so heinous. Poor judgement can easily become a case, so it’s important that companies have a clear expense policy. Expense policies are put into place to dissolve any confusion about protocols and procedures when dealing with company money.
The 4 Types of Expense Fraud
The above examples of expense and reimbursement fraud can be categorized into one of the four types outlined by the Association of Certified Fraud Examiners:
Mischaracterized expenses. This occurs when an employee mixes their personal expenses with business expenses.
Fictitious expenses occurs when the employee submits fake receipts.
Overstated expenses are inflated costs.
Multiple reimbursements occur when an employee submits multiple receipts for the same item.
How to avoid expense fraud in your company
It’s good to start with a clear and concise expense policy. Employees should be able to understand exactly what is expected when turning in reports and receipts.
Provide tools for employees to easily report expenses. Simplify the process with software, or similar resources to make reporting easy and accurate.
Consider your current system’s efficiency. Company cards or virtual transactions are easy to track.
Audit occasionally to encourage honest reporting.
Fair allowance rates can also prevent expense fraud. When your employees travel out of town, consider the rates of where they are and ensure the allowance can cover those expenses. Sometimes, an employee may consider expense fraud as a last resort.
Do you owe back taxes and want to regain compliance with the IRS?
Optima Tax Relief offers free consultations over the phone for tax debt assistance. Give us a call today at 800-536-0734.
