What You Need to Know Before You Rent Your Vacation Home

Laguna BeachRenting out a second home can help defray the cost of owning and maintaining the property. And there may be valuable tax benefits from the rental arrangement as well. At Morey & Associates, an Orange County CPA firm, we understand the tax implications and can help you make the most of renting your vacation property.

Here are some things to think about if you are going to rent out a vacation property.

Two Week Rule

Your rental income won’t be taxable as long as you limit the number of rental days to 14 or fewer each year. In this situation, you won’t be able to deduct your rental expenses (other than property taxes and qualifying mortgage interest).

More Than 14 Rental Days

Once you exceed 14 rental days, all rental income becomes taxable to you. But you may deduct various rental expenses. There are different limits on rental deductions depending on your personal use of the home.

All expenses associated with renting out the property, such as utilities and maintenance, are potentially deductible if you limit personal use of the home to no more than the greater of (1) 10% of the total number of days the home is rented or (2) 14 days. However, if there’s a rental loss, the tax law’s passive activity rules may limit your loss deduction.
Where personal use exceeds the 10% or 14-day threshold, your tax deductions for rental expenses generally will be limited to the amount of rental income you collect. No loss is allowed.
To learn more about vacation homes and taxes, give us a call today at 949-759-5626. Our knowledgeable and trained staff is here to help from our two office locations in Newport Beach and San Clemente.

Is Your Hobby a Business?

Is your activity a business or a hobby? It’s important to know because if the IRS views your activity as a hobby rather than as a business, your tax deductions for business-type expenses are subject to certain limitations.

Business Versus Hobby

To qualify as a business, an activity must be conducted for the primary purpose of making a profit. Factors that are considered in determining whether you have a profit-making objective include:

  • How the activity is conducted
  • Your expertise and that of any advisors
  • The time and effort put into the activity
  • Whether you expect that assets used in the activity will appreciate in value
  • Your success in other similar or dissimilar activities
  • Your history of income/loss with respect to the activity
  • The amount of any profit
  • Your financial status
  • The presence of personal pleasure or recreation
  • Generally, the IRS presumes that an activity qualifies as a business if it shows a profit for three out of the last five years.

What’s Deductible?

If your activity is considered a hobby, two rules limit the amount of expenses you can deduct. First, your deduction for hobby expenses (such as rent and advertising) cannot exceed the activity’s gross income. So if your hobby income is $5,000 but your expenses are $6,000, you may take only $5,000 in expenses. You may not use the additional $1,000 to offset other income.

Second, hobby expenses are deductible only to the extent they (when combined with other miscellaneous expenses) exceed 2% of your adjusted gross income (AGI). So in the example above, if your AGI was $100,000, you would be able to deduct only $3,000 of the $5,000 in expenses.

Running your activity in a businesslike way can help you avoid the hobby-loss restrictions. Connect with our Orange County, CA CPA Firm at 949-759-5626 for all the latest and most current tax rules and regulations.

Are There Advantages to Owning a Second Home?

Whatever the location, size, or value of a second home, certain tax advantages are built in. However, your opportunity to benefit from them depends on how you use the property.

Personal Use

Both property taxes and mortgage interest are as deductible for a second home as they are for your primary residence — and are subject to the same limitations. If you file a joint return, you cannot deduct interest on more than $1 million of acquisition debt ($500,000 for married persons filing separately) on one or two homes.

Two tax advantages of home ownership are not available for a second home — the immediate deduction of mortgage points when purchasing and the capital gain exemption when selling. Both tax breaks require the home to be your “principal residence.” However, you can deduct the points on your second home’s mortgage over the loan’s term.

Rental Use

More tax advantages become available if you forgo some of your personal use in favor of renting out your second home for part of the year. But there may be drawbacks as well.

If you rent out your home for 14 or fewer days during the year, you do not have to report rental income on your tax return, regardless of the amount, and there is no effect on your mortgage interest deduction. But you cannot deduct any rental expenses.

If you rent out your property for more than 14 days during the year, all rental income becomes taxable from day one. However, rental-related ownership expenses — including depreciation, maintenance, and utilities — become tax deductible. Your personal use of the second home affects the deductible amount. When personal use is more than 14 days (or 10% of the number of days your home is rented, whichever is greater), the maximum deduction is 100% of the rental income. Note that allowing relatives to use your vacation home usually counts as personal use, regardless of how much they pay for the privilege. And, if a friend rents your home for less than the fair market rate, that also counts as personal use.

If your vacation home qualifies as a rental property (i.e., personal use doesn’t exceed the allowable limits), a deduction is allowed only for mortgage interest allocated to rental use. That could be important. If you were to rent your second home during July only, for example, then only 1/12 of your interest expense would be deductible.

Deducting Losses

What if your rental expenses exceed the rent you collect? Only an “active” investor can deduct rental losses. If you actively participate in managing the rentals and maintaining the property, you can apply up to $25,000 of losses each year against your regular income. This loss deduction is phased out for taxpayers with adjusted gross income between $100,000 and $150,000. But, if you hire a manager, you become a passive investor and can use rental expenses to offset only rental income. However, you can carry any excess deductions forward to future tax years.

Your use determines the tax treatment of a second home. Before you decide to rent your second home for more than 14 days a year, carefully weigh the benefits and disadvantages.

Deductible Yacht and Motor Home Financing

Your second home doesn’t have to sit on a fixed foundation to qualify for tax advantages.

According to the IRS, a facility qualifies as a residence if it has sleeping, cooking, and bathroom accommodations. Therefore, your yacht or smaller boat can be a second home. So can a motor home of any size or value.

Provided the boat or motor home secures the purchase loan, your mortgage interest s as deductible as it would be on a more conventional second home. The same $1 million limit on total debt to buy or improve your residences also applies.

For more help with individual or business taxes, connect with us today. Our Orange County CPA Accounting team can help you with all your tax issues, large and small.

Protect Your Finances – Plan Today for an Emergency Tomorrow by Organizing Your Records Now

head-in-hands No one expects to be the victim of a disaster, but every year, people find themselves in the midst of fires, floods, earthquakes, and other catastrophic events, with little, if any, time to prepare.

With the fires and heavy rainfall that has hit California recently, it’s best to be prepared. And, every year, personal and financial records are lost because they can’t be located quickly in an emergency.

That’s why it’s important to take the time to organize your business and personal records and essential information so that they’re easily accessible if you are forced to leave your home suddenly.

What To Include

You’ll want to safeguard both personal and financial records.

Personal Records:

Birth certificates for you and your family
Adoption papers
Social Security cards
Health insurance identification cards
Marriage certificate, divorce decree, or separation agreement
Passports

Financial Records:

Deeds to your home and other property
Vehicle titles and registrations
Auto, life, and homeowners insurance policies
Bank account information
Investment records
Wills, trust agreements, and other estate planning documents
Mortgage and loan agreements
Credit card information
Copies of tax returns
You may also want to make a list of the names, addresses, and phone numbers of your financial institution, insurance agent, attorney, doctor, and financial advisor, and keep them with your records.

You’ve Gathered Them — Now What?

Now that you have all your important documents together, you’ll want to keep them that way. A fireproof box that you can take with you during an evacuation is one option. But you also should keep copies of all important documents in a safe place outside your home.

You could rent a safe deposit box and keep copies there. Just be sure that someone who doesn’t live in your home has a key. You may even want to stash some extra cash or a credit card in both places to cover expenses such as food or a hotel room.

Your Life in Words and Pictures

Having a list of what you own can help you with insurance claims or tax deductions in the event of a loss. Take an inventory of your furniture, audio and video equipment, appliances, computer equipment, jewelry, collectibles, and other expensive items. Write down what you paid for the items, and keep the list, along with sales receipts, with your important documents.

Photographing or videotaping your possessions can help you prove what you owned. Include the photos or tape in your fireproof container or safe deposit box.

You can buy computer software programs to help you organize your records. Make sure you print out a hard copy of the information or copy it to a disk and store it with your other important documents.

For more tips on how to keep business best practices front and center for your company, give us a call today at 949-759-5626. We offer a full range of business accounting services. We can’t wait to hear from you.

Get a Tax Credit when You Install a Home Renewable Energy System

452801359Thinking about installing a renewable energy system in your residence? Uncle Sam offers individual taxpayers a federal income-tax credit equal to 30% of the cost of qualified residential energy-efficient property (REEP).

What Systems Qualify?

Credit-eligible property includes:

  • Solar electric
  • Solar water heating
  • Geothermal heat pump (uses ground or ground water as a thermal energy source for heating or cooling)
  • Small wind energy (generates electricity using a wind turbine)
  • Fuel cell (generates electricity from hydrogen and oxygen through an electrochemical process)
  • The credit covers the cost of both the equipment and its installation, including labor and any piping or wiring necessary to connect it to your home.

The system must meet specified standards for energy efficiency. You should obtain a certification from the manufacturer that the component you are purchasing meets the relevant requirements for the REEP credit. Note that the manufacturer’s certification is different from the U.S. Department of Energy’s Energy Star label; not all products with the Energy Star label meet the credit requirements.

When available, the tax credit is quite generous. For example, let’s say you spend $6,000 on year on a home solar water heating system that meets all requirements for the REEP tax credit. After considering the $1,800 credit ($6,000 × 30%), the system costs you only $4,200.

Restrictions

The home you are installing the equipment in must be located in the United States and you must use it as your residence. The credit is not available for equipment used to heat a swimming pool or hot tub.

Solar, geothermal, or wind energy property can qualify for the credit whether it is installed in your principal residence or another residence. The credit for fuel cell property is limited to equipment installed in your principal residence.

As for cost, the tax law generally places no dollar limits on the credit. However, there is an exception for fuel cell property: The maximum credit is $500 for each 0.5 kilowatt of capacity.

Some states and public utilities offer incentives to encourage the purchase of energy-efficient property. Certain types of incentives may require an adjustment to your purchase price or cost for credit calculation purposes.

Connect with our team today for all the latest and most current tax rules and regulations.

What Start-Up Costs Can You Deduct?

200359336-001Starting a new business is an exciting prospect but there are many serious financial and tax implications that must be considered in order to be successful. Make sure you work with an Orange County, CPA firm that understands the needs of local businesses and can help a business that incorporates in California.

Launching a new business takes hard work — and money. Costs for market surveys, travel to line up potential distributors and suppliers, advertising, hiring employees, training, and other expenses incurred before a business is officially launched can add up to a substantial amount.

The tax law places certain limitations on tax deductions for start-up expenses.

    • No deduction is available until the business becomes active.
    • Up to $5,000 of accumulated start-up expenses may be deducted in the tax year in which the active business begins. This $5,000 limit is reduced (but not below zero) by the excess of total start-up costs over $50,000.
    • Any remaining start-up expenses may be deducted ratably over the 180-month period beginning with the month in which the active business begins.

Instead of deducting start-up costs, a business may elect to capitalize them (treat them as an asset on the balance sheet). Deductions for “organization expenses” — such as legal and accounting fees for services related to forming a corporation or partnership — are subject to similar rules.

Whether you need individual or business tax advice, give us a call at 949-759-5626 to reach our Orange County CPA firm. We can assist local small businesses with their business accounting needs, and specialize in new businesses advisory. We’ve got the answers you’re looking for, so don’t wait. Call us today.

Why Dental Work isn’t Covered by Medical Insurance

dentist-home3NBC’s Nicola Spector takes a look at why dental work is not covered under medical insurance. She notes modern dentistry’s roots are in the barbershop rather than more traditional medical practice. Until the nineteenth century, dentistry was practiced in the same chair in which men got their hair cut and their beards trimmed. Dr. Gary Glassman, an endodontist based in Toronto, Canada who also practices in the U.S., says such divergence between dental and medical is not helpful because “oral health is directly related to general health . . . The oral cavity is a gateway to your body. A lot of stuff in the mouth can indicate kidney disease, heart disease, diabetes, HPV, cancer, etc. Your dentist can be your first line of defense.”

Meanwhile, Dr. Adam C. Powell, president of healthcare-focused management advisory and operational consulting firm Payer+Provider Syndicate, notes that “Dental insurance, unlike medical, is not regulated and it tends to be very constrained . . . The annual maximum benefit is not that high, and there’s usually some sort of deductible.”

Read more at NBC News

What are the Tax Ramifications of Selling Rental Real Estate?

the dealAs with any significant transaction, the sale of rental real estate will have income-tax consequences you’ll want to understand ahead of time. It’s good to have a real estate CPA on your side when navigating this sale.

Although much will depend on the details of your specific situation, here are some key concepts to keep in mind.

Gain or Loss?

Figuring gain or loss for tax purposes involves comparing the amount realized on the sale to your “adjusted basis” in the property. Generally, your adjusted basis is equal to the amount you paid for the property, plus the cost of any improvements you made and minus depreciation deductions.

The tax law requires you to net your gains and losses from the sale of rental and business property held longer than one year against each other. If the result is a net gain, it generally will be taxed as long-term capital gain, except to the extent that special rules regarding prior depreciation and losses can result in less favorable treatment. If the netting process results in a net loss, you may deduct it in full against your ordinary income.

Potential Tax Benefit

You may have losses from renting the property that you weren’t allowed to deduct in previous years because of the “passive loss” rules. Those suspended losses generally will be deductible in the year you sell your rental property.

Contact us today for more tips on selling rental real estate at our Orange County, CA CPA Firm. Or, call us today at 949-759-5626

How to Improve Cash Flow For Your Business

Hand put coin to moneySlow paying customers, seasonal revenue variations, an unexpected downturn in sales, higher expenses — any number of business conditions can contribute to a cash flow crunch. If you own a small business, you may find the suggestions that follow helpful in minimizing cash flow problems.

Billing and collections

Your employees need to work with clear guidelines. If you don’t have a standardized process for billing and collections, make it a priority to develop one. Consider sending invoices electronically instead of by mail. And encourage customers to pay via electronic funds transfer rather than by check. If you don’t offer a discount for timely payment, consider adding one to your payment terms.

Expense management.

Know when bills are due. As often as possible, pay suppliers within the period that allows you to take advantage of any prompt-payment incentives. Remember that foregoing a discount in order to pay later is essentially financing your purchase.

Take another look at your costs for ongoing goods and services, including telecommunications, shipping and delivery, utilities, etc. If you or your employees travel frequently for in-person meetings, consider holding more web conferences to reduce costs.

Inventory

Focus on inventory management, if applicable, to avoid tying up cash unnecessarily. Determine the minimum quantities you need to keep on hand to promptly serve customers. Systematically track inventory levels to avoid overbuying.

Debt management

Consider how you use credit. Before you commit to financing, compare terms from more than one lender and keep the amount to a manageable level. For flexibility, consider establishing a line of credit if you do not already have one. You will be charged interest only on the amount drawn from the credit line.

Control taxes

Make sure you are taking advantage of available tax breaks, such as the Section 179 deduction for equipment purchases, to limit taxes.

Develop a cash flow budget

Projecting monthly or weekly cash inflows and outflows gives you a critical snapshot of your business’s cash position and shows whether you’ll have enough cash on hand to meet your company’s needs.

Don’t get left behind. Contact us today at 949-759-5626 to discover how we can help you keep your business on the right track. Don’t wait, contact our Orange County CPA Firm.

What are the Tax Advantages of Being a Landlord?

Woman inspecting house interior
Owning rental property can bring in extra income, but it’s not without its downsides. If the furnace breaks or a pipe bursts, you can be sure you’ll get the call — sometimes in the middle of the night. But for all the hassles being a landlord can bring, there are some bright spots. One of them is the ability to deduct certain expenses from your total rental income on your tax return.

Owning a rental home, apartment, or other residential property may entitle you to take some or all of the following deductions.

House Calls

Real estate taxes and mortgage interest on rental property are potentially deductible, as are fire, flood, theft, and liability insurance premiums. Services, such as lawn care, performed on the rental property and any wages you pay employees in connection with the rental activity may be deductible as well.

Wanted: Tenants

You can deduct expenses associated with renting the property, including management fees, commissions, and cleaning and maintenance.

This Old House

The costs of repairs that keep the property in good condition, such as painting, are deductible in the year you incur them.

Cost Recovery

You generally can begin claiming deductions for depreciation on rental property in the year the property is ready and available for rent. In addition, you can recover the cost of improvements that add value to your property, such as replacing the roof or adding a deck, by claiming depreciation over time.

Over the River, Through the Woods

You may be able to deduct the expenses of traveling to your property when the main purpose of your visit is to collect rental income or to manage and maintain the property.

It’s important to keep complete and accurate records of all expenses related to your rental property. Keep in mind that there are tax law limits on deducting losses from rental activities.

Don’t deal with tax issues on your own. Call us right now at 949-759-5626 to find out how we can provide you with the answers you need. Or, learn more about our real estate CPA accounting services on our website.