Investors & landlords

I was basically making sure I could deduct utilities, insurance and depreciation during 2019 while we were unable to rent th property. Thank you.

I just want to ensure you understand how this works, so you're not shocked when you see your rental expenses have absolutely no impact on your 2019 tax liability.

First, you have absolutely no rental income for 2019. Understand that rental income is passive income. Therefore your rental expenses are also passive. Passive expenses can only be deducted from passive income. So while you will "claim" your rental expenses, since you're not a real estate professional those expenses won't be "allowed" since you have no passive income to deduct them from. Those claimed but unallowed expenses will be "carried forward" to the next year where you can deduct them *if* you have the passive income to deduct them from. But if you don't "claim" your 2019 rental expenses, then you flat out can not carry them forward to 2020. Period. So while you'll claim them, don't be surprised when it makes no difference to your tax liability.

Additional information: It is *EXTREMELY* rare for rental property to ever show a taxable profit "on paper" at tax filing time. That's because when you add up the allowed deductions each year of property taxes, mortgage interest, insurance, and the depreication you are required to take by law, those four items alone will almost always exceed whatever amount of rental income you received for the year. Add to that your other allowed rental expenses (repairs, cleaning, maintenance, etc.) and you are practically guaranteed to "never" have a tax profit for every single year you own that property.

What happens every year is that once your rental deductions gets your taxable rental income to zero, the excess deductions are carried over to the next year. As this continues over the years you'll note that your carry over losses on the rental get larger and larger with each passing year. You can see your passive carry over losses on IRS Form 8582.

All those carry over losses can not be realized until the tax year you sell the property. Here's how the losses help you (and the depreciation hurts you) in the tax year you sell the property.

-First, all prior depreciation is recaptured. The recaptured depreciation will be taxed anywhere from 0% to a maximum of 25%. the simplest way to took at it, is to reduce your cost basis in the property by the total of all depreciation taken. So if you paid $100,000 for the property and in the year you sell you have $20,000 of depreication, your cost basis for the purpose of determining your taxable gain on the sale is $80,000. So even if you sell it for the $100,000 price you paid for it, you have a $20,000 taxable gain. Period.

 - Next, all of your carry forward losses from the IRS Form 8582 are subtracted from the taxable gain you made on the sale, thus reducing the amount of that gain that is taxable.

 - Next, if those carry forwards reduce your taxable gain on the sales proceeds to zero and there are still losses left to claim, the remaining losses can be claimed against other "ordinary" income, such as your W-2 taxable income. There's a limit of $3000 that can be claimed against that other ordinary income (unless you are a real estate professional). So any losses left to claim once that limit is reached, is just carried forward to the next year where you can deduct it once again from other "ordinary" income... and so on and so on until all the losses have been used up.

Finally, in your case you have an insurance payout. Since your insurance premiums you paid for that insurance on the rental property in each tax year you paid those premiums was a deductible rental expense on the SCH E, that means the insurance payout is reportable (and taxable) income to you. If you need help to correctly report this, let me know and I'll help. It's also common for rental property insurance policies to include a payout for "loss of rent". Commonly insurance companies will pay  a maximum of 85% of the monthly rent for an average of 6 months. So you "MUST" report that as rental income on your tax return, on the SCH E in the tax year you received that payout.

Generally the insurance company will send you some type of tax reporting document or a "letter in lieu" of a tax reporting document that will detail how much of the payout was for lost rent, and how much was for your property loss. You "must" report the amount they say as lost rent, as rental income on the SCH E in the tax year you receive that payout.

Again, if you need help with this, just let me know. Been there, done that, got the T-shirt. 🙂