US tax series-4

Rent

Rental Income.

Royalty Income.

Schedule E.

Rent Income:
Rental income is any payment you receive for the use or occupation of the property.
This is usually in the form of cash. However, if the tenant provides certain services, the value of the services is treated as rental income.

Advance Rent:
Any amount received before the period that it covers.
Include it in the rental income irrespective of the period covered or accounting method used.

For Example: You sign a 10 year Lease to rent your property. In the First year you receive $5000 for the first year of lease and $5000 as rent for the last year of the lease. You must include $10,000 in your income in the first year

Security Deposit: Do not include a security deposit on your income if you plan to return it to the tenant at the end of the lease

Expenses paid by tenant:
If your tenant pays any of your expenses then it is treated as rental income.
Payment for canceling the Lease:
If your tenant pays you to cancel the lease then the amount you receive is rent.

Rental Expenses:
You can deduct expenses that are ordinary and necessary expenses for managing, conversing or maintaining the property.

Deductible Expenses are:
Vacant Rental Property: Expenses for managing, conversing or maintaining the vacant property can be deducted.

Depreciation: You can begin to depreciate a rental property once it is ready and available for rent.
Other Expenses:
Advertising.
Cleaning and Maintaining.
Utilities.
Insurance premium.*
Tax preparation fees.*
Taxes*
Travel Expenses.*

Repairs and Improvements:
Repairs:
Repairs keep the property in good operating condition.
For example:
Repainting your house.
Fixing Broken windows.
Fixing Leaks.

Improvements:
Improvement adds value to the property, prolongs it’s useful life or adapts it to new uses.
For example:
Adding a room
Putting up a fence
Putting up a new roof, new plumbing or new wiring.
Improvements must be Capitalized. This capitalized cost can be depreciated as if it were a new property in itself.

Personal Use of Dwelling Unit
If you have any personal use of your dwelling Unit that you rent you must divide your expense between rental use and personal use.
You use a dwelling unit as home if you have used for personal purposes more than the greater of
- 14 days or
- 10% of total days it is rented to others at a fair rental price.

Reporting Expense
If the dwelling unit is
- Used as home and rented out less than 15 days, then do not include any rental income in your income and you can not deduct any rental expenses also.
- Used as home and rented out for more than 15 days, then you can include all your rented income in your income.

•Royalty is the payment to the holder of a patent or copyright or resource for the right to use their property.
•Royalty from copyrights and patents
Royalty from oil, gas or mineral properties

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US Tax series -3

Capital Gains and Losses

-Definitions and Basics.
-Classification of Gains /Losses.
-Treatment of Losses.
-Schedule D

Capital Assets

Capital assets are properties specified in the tax law that give rise to capital gain or loss.
All property is considered a capital asset, except:
•Property held for resale (inventory)
•Real or depreciable property used in a trade or business (i.e., operational or fixed assets) (see IRC §§1231, 1245, and 1250)
•Accounts or notes receivable acquired in normal course of business

•Copyrighted or a literary, artistic, or musical composition in the hands of the creator or anyone who assumes the creator's basis (i.e., the property was received as a gift)
•U.S. government publications received from the government at a reduced price
•Almost everything you own and use for personal purposes or investment is a capital asset.

Holding Period:

length of time an asset has been owned (held).

In general, Assets owned longer than one year have been held long term. Assets owned one year or less have been held short term.

Cost Basis:
The basis of property is usually its cost. The cost is the amount paid in cash, debt obligations, other property, or services. It includes:
• Sales tax.
• Freight.
• Installation and testing.
• Excise taxes.
• Legal and accounting fees (when they must be capitalized).
• Revenue stamps.
• Recording fees.
• Real estate taxes (if assumed for the seller).

Adjusted Basis:
Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, certain adjustments (increases and decreases) are made to the basis of the property. The result of these adjustments to the basis is the adjusted basis.

Fair market value (FMV): is the price at which the property would change hands between a willing buyer and a willing seller, neither having to buy or sell, who both have reasonable knowledge of all the necessary facts.

Sales of similar property on or about the same date may be helpful in figuring the FMV of the property.

Short-term capital gain is taxed at the same rates as ordinary income, regardless of the seller's tax bracket.
Long Term Capital Gain is taxed at 20%.(Reduced to 15% rate this year for assets sold after May 05, 2003)

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