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Visitor III

State back tax deduction from rental income

I have a rental property and collected and remitted (7%) taxes to the county.  However I was not aware  that I also had to collect and remit (6%) sales and user tax to VA state.  I registered this year with the state and had to remit back tax over the past 3 years that I had not collected and had to pay from my rental income. Can I deduct this back tax from my federal return this year?

3 Comments
Catalyst V

State back tax deduction from rental income

Yes you can. You'll enter it in the Common Expenses section in the box for "Other Taxes", and not the box for real estate taxes. Understand that you can only claim the actual taxes paid. You can not claim any fines, penalties, late fees or interest that you may have paid. You can only claim the actual taxed amount, and that's it. You just have to suck it on the rest, unfortunately.

Now I am curious. A "sales & use tax" on rental property? While I'm not doubting you of course, I've never heard of that on residential rental property. However, I have heard of it on something like short term rentals more commonly referred to as vacation rentals. Is that what you have maybe? I ask, because for short term rentals it's perfectly possible that if conditions are met, you would be reporting this as SCH C income, and not SCH E.

Visitor III

State back tax deduction from rental income

Yes, it is for a short term rental for stays of less than 30 days. If longer I don't withold. I discussed it earlier with a Turbotax CPA and she told me that I could not deduct it from my rental income. I had read similar responses like yours and doubted her conclusion (maybe she misunderstood my question). Thanks for your response and believe you are right. Can you refer me to an IRS or other link that confirms your conclusion?

Catalyst V

State back tax deduction from rental income

" If longer I don't withhold."

My apologies, but that makes no sense to me. But then, I'm in FL where laws are different. In my state, if I rent out a property for 30 days or less for *any one period* during the tax year, then it's considered a short term rental for the *entire* year. Then I have to pay a $3 per night per person"bed tax" to the county for each and every night it was occupied during the entire tax year. It gets complicated on the federal side then, because a "short term rental" as defined by my state is reported on SCH C.  For a short term rental it's assumed I am providing recurring services to multiple tenants and therefore "earn" the income by "doing something" on a recurring basis throughout the year. In other words, I'm operating the equivalent of a hotel, not a rental.

discussed it earlier with a Turbotax CPA and she told me that I could not deduct it from my rental income.

The CPA may be right. But based on "their" understanding of your situation, and their understanding may not be right. Even my understanding may not be right. The big drawback is that not only am I not familiar with your state laws on this, it's perfectly possible the CPA you talked to in CA is not "as familiar" as they need to be with the laws of your state.

You've got time, so I would highly advise you discuss this with a CPA or Tax Attorney in your local jurisdiction that is licensed in your state. It would be well worth the time and the money they would charge for the consultation. You've already paid fines, penalties, late fees and/or interest on the back taxes you paid. So you don't need to screw this up on the federal side and end up paying all that non-deductible stuff to the IRS too, later down the road.

Your situation is particularly perplexing to me, because by my state laws I see a short term rental where all income for the entire year is SCH C income, not SCH E.

Can you refer me to an IRS or other link that confirms your conclusion?

I no longer have a "final" conclusion on this now, since you provided additional information after your initial post, that has be perplexed due to my lack of knowledge on your state laws. That's why I strongly encourage you to seek local legal advice. Do note that one thing I do know for a fact, is that whatever you pay for legal advice and assistance on this matter, is a deductible rental expense. You'll claim it in the common expenses section at the very, very end of that section. On the Screen for "Any Misc Expenses?" just label it something like "Legal fees (Tax law)" then enter the amount and press on. Do note that if you pay the lawyer or CPA more than $600, while you are not required to issue them a 1099-MISC, I would highly advise you do so anyway in this particular situation. But only if you pay them more than $600. (I doubt you'll pay more than $300 myself.)

 

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