State tax filing

I live in PA and the rental property is also in PA.

Based on the feedback, I have reviewed the following.

1. Prep Guide:  “Personal Income Tax Preparation Guide for Personal Income Tax Returns PA-40”
2. PA-40IN:  “Pennsylvania Personal Income Tax Return 2023 Instructions Booklet”
3. PA-40E:  “PA Schedule E” form and instructions
4. Pub 946: “How To Depreciate Property”

Based on this review, my understanding of the requirements / proper way to report this income on the PA-40 return is as follows.

1. Definition of Rental Income
   1. Prep Guide:  “Rental income is income received for the use of real or personal tangible property subject to depreciation.”  (Line 6; page 52)
   2. PA-40IN:  “Rental income includes the amounts you receive for the use of, or the right to use, your real or personal property.” (Line 6; page 18)

>>Take-away:  In order to be considered as Rental Income by the state of PA, the property has to be subject to depreciation.

B. I couldn’t find anything in a PA state publication that discussed whether a property was subject to depreciation, but another website said that PA follows the federal guidelines.

C.  Pub 946:

1.  Basic Requirements to be Depreciable (Overview of Depreciation, Page 4)

“To be depreciable, the property must meet all the following requirements.

• It must be property you own.
• It must be used in your business or income-producing activity.
• It must have a determinable useful life.
• It must be expected to last more than 1 year.”

2. Clarification on Incoming-Producing Activities (Property Used in Your Business or Income-Producing Activity, page 5)

“To claim depreciation on property, you must use it in your business or income-producing activity. If you use property to produce income (investment use), the income must be taxable.  You cannot depreciate property that you use solely for personal activities.”

>>Take-away:  Property which is used solely for personal activities is not subject to depreciation.

D. Rental vs. Personal Use

1. Any day in which the property is rented “…at less than a fair rental price” is considered to be a personal use day.  (Pub 527, Dwelling Unit Used as a Home, pages 27-28)

>>Take-away:  Property rented the entire year at less than fair market value is considered to be used solely for personal use.

E.  Where to Report on the PA-40

1.  PA-40IN:  “Generally, other or miscellaneous income is either compensation on Line 1a, (see Page 10), or business income on Line 4, (see Page 17).”  (PA Income Classes, page 😎

2.  Income from long term (>30 days) rentals not rented with the intent to generate profit does not meet the criteria to be reported on PA Schedule C / PA-40 Line 4.  (PA-40IN, Line 4, page 17)

3.  Income from rentals not rented with the intent to generate profit does not meet the definition of Rental Income (see above), so it would not be reported on PA-40 Line 6.

>>Take-away:  Income from rental property that is not intended to generate profit should be reported on PA-40 Line 1a.

F.  How Much to Report on PA-40, Line 1a (Gross or Net)

1.  PA-40IN:  “CAUTION: PA-taxable interest income (Line 2), dividend income (Line 3) and gambling and lottery winnings (Line 😎 are gross taxable income classes. You may not deduct any expenses in computing these classes of income. In computing compensation, only certain expenses are deductible; see the PA Schedule UE instructions beginning on Page 26. The remaining classes of income are net taxable - you may deduct ordinary and necessary expenses paid or accrued during the taxable year in their production. See the line instructions for each class of income.”  (Deductions, page 9)

2.  PA-40IN: “CAUTION: Generally, PA law follows IRC Section 280A if you rent or lease your property, but do not intend to realize a profit.  Therefore, your rental expenses are limited to your rental income, and you may not use a loss.”  (Line 6, page 19)

3.  PA-40IN: “See the PA Schedule E instructions beginning on Page 33 for the allowable expenses.”  (Line 6, Rental and Royalty Allowable Expenses, page 19)

>>Take-away: The amount of income from the rental reported on PA-40, Line 1a is the gross amount received, less allowable expenses as defined by PA-40 Schedule E, as long as the expenses do not exceed the rental income.

Is this understanding correct?