Saturday, January 15, 2011

New Requirements for Landlords

Q.  Since buying our motor home, we have rented our house while waiting for the real estate market to rebound. While having lunch the other day, the people at the table next to us were talking about all the new reporting rules pertaining to landlords. Can you enlighten me? JN, Iowa

A.  Apparently many RVers are also landlords, as I've had several questions along these lines. Here's the scoop. The Small Business Jobs Act effectively declared real estate as a business for information reporting purposes. Then, along came the Health Care Act, which is trying to eliminate the underground economy. Together, they're going to keep landlords very busy!

This means, that beginning in 2011, for any person or persons whom you pay $600 or more to in the course of the calendar year for services, you are required to report this on Form 1099.  Before actually handing over any money for compensation, have them fill out a W-9 Form. You may need to tell them, no form, no check! This is the new rule for this year. But . . . it gets worse:

Beginning 2012, you must report anyone you pay $600 or more to during the course of a year, (pertaining to your business) a 1099 form not only for services, but for goods and tangible property as well. This is a real headache! The only exception is for payments made by credit card rather than by check or cash. In other words, if the gardener won't accept your credit card, you need to issue them a 1099. Many businesses, of course, are hoping this will be repealed during the year, but I'm not holding my breath! Stay tuned.

Friday, January 14, 2011

Business Entity

Q:  My neighbor suggested that I put our 5th wheel into a corporation or LLC, thus turning it into a business, in order to write it off. Will this really work? BM, New Jersey

A.  And your neighbor's professional qualifications are . . .?  The ability to write off your 5th wheel isn't an issue of having a business entity. The only thing that matters is that you use it for business. If you aren't in business, there is no write off. And even if you do have a business, it may not meet the ordinary and necessary requirements set forth by the IRS. Remember also, that each state is different. A separate taxable entity, whether it be a corporation, partnership, limited liability company, family limited partnership, etc. exists only in the eye of the state. Each state has different requirements, and some states now charge a minimum tax just to have the entity in existence. Unless you are prepared to pay extra fees for the entity tax returns, licenses or fees by the Secretary of State, and extra fees for the bookkeeping requirements (you get the idea) . . . . keep it simple!

Remember, this blog is for addressing income tax issues, but quite often, legal ramifications get intermingled. If your neighbor happens to be an attorney, he may have had something in mind, but many attorneys give very sound legal advice, but fail to explain to clients the income tax ramifications and extra costs involved. This very topic came up yesterday when a client called regarding his real estate business. I suggested he contact his broker to check on their errors and omissions policy. We all want to limit our personal liability; but sometimes an insurance policy is the simpler and less costly answer.

If it sounds too good to be true, it is! Even though I do some work while in my rig, I don't write any of it off. I wouldn't pass the ordinary and necessary test, the record keeping is onerous and my job when we are on the road is to have fun!

Thursday, January 13, 2011

Motor Vehicle Department Fees

Q.  In trying to gather the information for our tax organizers this year, I see we may be able to deduct the fee we pay the Motor Vehicle Department. Do I really need to find the bill? Can't we just take the amount from our checkbook?  JB, Kentucky

A.  You really need to start searching for that bill.  The total amount of the check will include registration fees, special county fees, possibly weight fees, and a myriad of other charges by state and local governments. The only portion you can deduct is the actual tax on the value of your RV.

Tax Tip:  The above is true only if you itemize your deductions on Schedule A. If you take the standard deduction, remember, all taxes together with medical, interest, charity, and miscellaneous items are included.

Wednesday, January 12, 2011

Establishing your tax basis for depreciation

Q:  In reading the instructions for depreciation, I'm not quite certain what is meant by the lower of basis or Fair Market Value. Can you please explain? JE, Nevada

A.  When depreciating an asset, the beginning point is when you place the asset into business use. Thus, for example, you could start renting a house which you lived in for 10 years prior to taking off in your RV. The depreciation would start as soon the house becomes available for business use. With the declining real estate market, the depreciable basis would be the lower of the purchase price, less the value allocated to the land beneath the house, plus the capital improvements made during the years you owned the house; or today's fair market value, less the allocation for land value. Whichever of the two is lower, would be the basis for depreciation.

PS. Since my previous answer, depreciation is no longer allowed for RVs. See Jackson, T.C. Memo 2014-160, August 7, 2014.

Tuesday, January 11, 2011

Depreciation recapture

Q.  I recently read an article about depreciation recapture. What is this? GN, Arkansas

A.  First, it helps to remember that income tax rates come in two flavors: Capital gains, and Ordinary gains. Capital gains have most favorable tax treatment, at the lowest rates. With that understood, depreciation recapture is the term used to recapture depreciation previously taken on an asset when the asset is disposed. Let's say you sold your RV for a total gain of $10,000.  Over the years, you took, as an ordinary expense, depreciation of $2,000.  Since assets held more than 1 year are considered to be a Capital asset, you would pay whatever the capital gain rate is in the year of disposal. However, because over the years you wrote off $2,000 at ordinary rates, you now must recapture the depreciation at ordinary rates. In this over-simplified example, since the total gain was $10,000, you would report a capital gain of $8,000 and an ordinary gain of $2,000. In real life and the current economy, the chance of having any type of gain on the disposal of an RV would be remote at best.

PS. Since my previous answer, depreciation is no longer allowed for RVs. See Jackson, T.C. Memo 2014-160, August 7, 2014.

Monday, January 10, 2011

Non-Resident State Taxes

Q.  Apparently our investment adviser put us into some investment which included royalties in Oklahoma. Since my husband and I are residents of Texas, we don't need to pay state income taxes. A few weeks ago we received a letter from the state of OK requesting a state income tax return. My husband said to ignore it, but I don't want any trouble. What should we do? JG, Texas

A.  Every state having a state income tax has a filing requirement depending on Gross Income, your filing status, and your age. Quite often the filing requirement threshold for a non resident is lower than if a resident. I did look at OK and found that in 2009, non-residents with a Gross Income of $1,000 or more were required to file a return. Based on receiving a letter from OK, you probably are required to file a return. This doesn't mean you will owe taxes, but you need to file the return and meet the state's requirement.

Tax Tip:  Many states are sending out letters to non-residents requesting state income tax returns. Technology today has caught up with all of us. Every state knows the amount of gross receipts earned by any taxpayer. Many of my clients are shocked when they learn they now need to file in 2,3,4 or more states. This doesn't mean you will pay double tax, but double filing, if you will, is required. For residents of states which have income taxes, any tax owed to the non-resident state is usually taken as a credit on the resident state return, if taxes are due.

For your convenience, I have placed a link to the Department of Revenue or state equivalent for all 50 states on the left. If in doubt, check, as penalties and interest add up fast!