What are the Tax Implications If I Change My Home to a Rental Property?

If an owner changes their home (or a part of it) to rental use(rental property) at any time other than at the beginning of the tax year, the owner must divide yearly expenses, such as taxes and insurance, between rental use and personal use.

The owner can deduct as rental expenses only the part of the expense that is for the part of the year the property was used or held for rental purposes.

Property should be treated as having been placed in service on the conversion date for purposes of depreciation.

An owner cannot deduct depreciation or insurance for the part of the year the property was held for personal use. However, the owner can include the home mortgage interest and real estate tax expenses for the part of the year the property was held for personal use as an itemized deduction on Schedule A (Form 1040).

Example: Abby’s tax year is the calendar year. She moved from her home in May and started renting it on June 1. Abby can deduct as rental expenses seven-twelfths of her yearly expenses, such as taxes and insurance. Starting with June, she can deduct as rental expenses the amounts she pays for items generally billed monthly, such as utilities etc. 

Good accounting practices will take you a long way in this case!

I bought an Airplane. How do I write it off and yet be compliant considering that plane owners have high audit rates?

Airplanes can be written off assuming that more than 50% of the use is for business purposes. You can use it to get to everyday work or clinch real estate deals. 

Some big-ticket items that can be used to write off the entire value of the asset would be the Sec 179 deduction and/or Bonus Depreciation. Bonus Dep. has started to phase away beginning this tax year. Used to be 100% earlier. It’s now at 80% which means only 80% of the value of the plane can be written off in the first year itself. But then you also have the Sec 179 deduction, don’t forget to take that. It’s not going away anytime soon!

Under Sec 162(a), businesses can deduct all expenses that are “ordinary, necessary, and reasonable.” You get the idea, right!?



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