Stock Investing

[MWil23]

@bigjohnson2009 @ramssuperbowl99 can either of you help me with some tax knowledge going forward (2020 Tax Year, to be filed next year)?

Long story short, my wife and I will be renting out our basement and looking at earning $9,000 this year (August through December), as well as a projected $20,000 annually starting in 2021. I work full time and my wife works 20 hours a week. We have to pay cash to finish our basement, factor in miscellaneous expenses/write-offs, etc.

How should I claim this income? How do I write things off/go about this? Would I be fine doing our taxes myself the way that I always have, or should I have someone else do this for me?

[MikeT14]

That's a hell of a basement. 

[ramssuperbowl99]

22 minutes ago, MWil23 said:

@bigjohnson2009 @ramssuperbowl99 can either of you help me with some tax knowledge going forward (2020 Tax Year, to be filed next year)?

Long story short, my wife and I will be renting out our basement and looking at earning $9,000 this year (August through December), as well as a projected $20,000 annually starting in 2021. I work full time and my wife works 20 hours a week. We have to pay cash to finish our basement, factor in miscellaneous expenses/write-offs, etc.

How should I claim this income? How do I write things off/go about this? Would I be fine doing our taxes myself the way that I always have, or should I have someone else do this for me?

https://www.hrblock.com/tax-center/income/real-estate/renting-out-room-tax-implications/

[bigjohnson2009]

52 minutes ago, MWil23 said:

@bigjohnson2009 @ramssuperbowl99 can either of you help me with some tax knowledge going forward (2020 Tax Year, to be filed next year)?

Long story short, my wife and I will be renting out our basement and looking at earning $9,000 this year (August through December), as well as a projected $20,000 annually starting in 2021. I work full time and my wife works 20 hours a week. We have to pay cash to finish our basement, factor in miscellaneous expenses/write-offs, etc.

How should I claim this income? How do I write things off/go about this? Would I be fine doing our taxes myself the way that I always have, or should I have someone else do this for me?

This is going to be a situation where you do some allocations based on square footage similar to a home office.. Tough part is you've converted a portion of your home to a business asset and so that portion won't qualify for the principal residence exclusion when you eventually sell.

You and your spouse can exclude 500k in appreciation on your principal residence from income. If the basement is 25% of the house and the house appreciated $100,000 you'll be on the hook for cap gain at 25k (plus depreciation recapture on any depreciation used to offset the rent income over the years) Sounds like the juice is worth the squeeze though.

[MWil23]

5 minutes ago, bigjohnson2009 said:

This is going to be a situation where you do some allocations based on square footage similar to a home office.. Tough part is you've converted a portion of your home to a business asset and so that portion won't qualify for the principal residence exclusion when you eventually sell.

You and your spouse can exclude 500k in appreciation on your principal residence from income. If the basement is 25% of the house and the house appreciated $100,000 you'll be on the hook for cap gain at 25k (plus depreciation recapture on any depreciation used to offset the rent income over the years) Sounds like the juice is worth the squeeze though.

We are hoping that this will be our forever home, so hopefully moving isn't a factor, albeit per your point that is good to know.

Also, could I claim 2 out of 6 bedrooms instead of square footage? (1/3)

Out of curiosity, will I still get a tax return since I don't claim any of my kids (sorry to let you down@ramssuperbowl99) despite having to claim $20K? I take it I would claim it as MISC income and then write off things like renovations, utility bills (1/3), furnishings, etc?

Just trying to figure out how much I'd need to set aside for Uncle Sam. Don't get me wrong, I'm not going to gripe if I have to pay some, as renting it out is more than worthwhile based upon our future goals of college/weddings funds (3 girls), secondary mutual fund investments, and a 15 year mortgage.

Any/all advice is welcome and thanks again guys.

[winitall]

24 minutes ago, MWil23 said:

We are hoping that this will be our forever home, so hopefully moving isn't a factor, albeit per your point that is good to know.

Also, could I claim 2 out of 6 bedrooms instead of square footage? (1/3)

Out of curiosity, will I still get a tax return since I don't claim any of my kids (sorry to let you down@ramssuperbowl99) despite having to claim $20K? I take it I would claim it as MISC income and then write off things like renovations, utility bills (1/3), furnishings, etc?

Just trying to figure out how much I'd need to set aside for Uncle Sam. Don't get me wrong, I'm not going to gripe if I have to pay some, as renting it out is more than worthwhile based upon our future goals of college/weddings funds (3 girls), secondary mutual fund investments, and a 15 year mortgage.

Any/all advice is welcome and thanks again guys.

The original respondent can correct me if I am wrong, but I believe you will have to use actual square footage and not bedrooms number. It basically comes down to the fact that things such as mortgage interest, utilities, etc. are for the entire house and allocating other than square footage would most likely inflate the amount the amount you can deduct. Luckily you will most likely only have to do the square footage calculations once.

I would also recommend with any repairs, etc. that you are going to deduct that you keep relatively detailed notes. If you go to Home Depot for some materials, try to keep what you are going to deduct separate from anything you are picking up for the rest of the house, or at least mark up the receipt with what each item was for with a highlighter or something. It will make it a ton easier come tax time and will reduce the headache if the IRS comes knocking if you can prove X materials were only for the rental portion. 

As far as the income itself, I believe you will end up filing a schedule E with your 1040. The form is relatively easy if you take your time.  As far as whether you will still get a refund, I guess that would depend on how much you got back this year and your marginal tax rate?  

[MWil23]

2 minutes ago, winitall said:

As far as the income itself, I believe you will end up filing a schedule E with your 1040. The form is relatively easy if you take your time.  As far as whether you will still get a refund, I guess that would depend on how much you got back this year and your marginal tax rate?  

Thanks! I got $6,000 back Federal, $500 back from the state. As for marginal tax rate, I'm not sure exactly where that bracket is.

[winitall]

13 minutes ago, MWil23 said:

Thanks! I got $6,000 back Federal, $500 back from the state. As for marginal tax rate, I'm not sure exactly where that bracket is.

Assuming you are MFJ, I’m going to assume you are in either the 12% ($19751-$80250 Taxable Income) or 22% ($80251 to $171050).  If you and your spouse made over 80,250 last year, that $20,000 - expenses will be taxed at 22%. Considering how much you got back last year, it appears you are most likely going to be okay and at most owe a little if the extra income reduces your eligibility for any credits you took last year.  From a state perspective, I have no idea about Ohio income tax rates.  

 

 

[MWil23]

1 minute ago, winitall said:

Assuming you are MFJ, I’m going to assume you are in either the 12% ($19751-$80250 Taxable Income) or 22% ($80251 to $171050).  

Got it. Then we will be in the 22% bracket either way.

1 minute ago, winitall said:

If you and your spouse made over 80,250 last year, that $20,000 - expenses will be taxed at 22%. Considering how much you got back last year, it appears you are most likely going to be okay and at most owe a little if the extra income reduces your eligibility for any credits you took last year.  From a state perspective, I have no idea about Ohio income tax rates.  

So essentially, if I got back $6,500 last year and am in the above bracket, I may not get a return and/or may owe a little bit, but I'm not looking at shelling out something like $6K to Uncle Sam in lieu of a $6,500 refund, correct?

We have 3 kids that we don't claim throughout the year that I claim on my Federal return annually. 

[theJ]

25 minutes ago, MWil23 said:

We have 3 kids that we don't claim throughout the year that I claim on my Federal return annually. 

Oh that's what you meant.  I was thinking, who the hell doesn't claim their kids on their taxes?  It's free money back, lol.

Are you doing your tax prep by hand?  The big tax prep sites should walk you through all this.  They also have the option to talk to a CPA directly (though that costs more).

[bigjohnson2009]

22 minutes ago, MWil23 said:

Got it. Then we will be in the 22% bracket either way.

So essentially, if I got back $6,500 last year and am in the above bracket, I may not get a return and/or may owe a little bit, but I'm not looking at shelling out something like $6K to Uncle Sam in lieu of a $6,500 refund, correct?

We have 3 kids that we don't claim throughout the year that I claim on my Federal return annually. 

He is correct it goes on Schedule E and you'll want to use square footage. You may not show much profit after allocating your mortgage interest, taxes, insurance, repairs, utilities, HOA, depreciation, etc. but you'll be tax marginally on the net. It will probably end up just reducing your typical refund for Fed and state rather than needing to set aside money. Your bigger concerns might be:

1. do you need a business license where your'e at

2. are you going to end up subject to sales/hospitality taxes

3. if you're in an Ohio city you may want to budget for city taxes on the net.

 

[MWil23]

1 minute ago, theJ said:

Oh that's what you meant.  I was thinking, who the hell doesn't claim their kids on their taxes?  It's free money back, lol.

Are you doing your tax prep by hand?  The big tax prep sites should walk you through all this.  They also have the option to talk to a CPA directly (though that costs more).

I always use TurboTax, which is easy and efficient.

I'm more or less also trying to figure out how much I should set aside (if any) and what deductions/receipts I can keep. 

[MWil23]

Just now, bigjohnson2009 said:

He is correct it goes on Schedule E and you'll want to use square footage. You may not show much profit after allocating your mortgage interest, taxes, insurance, repairs, utilities, HOA, depreciation, etc. but you'll be tax marginally on the net. It will probably end up just reducing your typical refund for Fed and state rather than needing to set aside money. Your bigger concerns might be:

1. do you need a business license where your'e at

2. are you going to end up subject to sales/hospitality taxes

3. if you're in an Ohio city you may want to budget for city taxes on the net.

 

Gotcha! I guess here is what I'm asking:

*Do I have to claim ALL of that income as MISC income and then separately itemize those deductions

or

*Do I deduct those deductions, subtract that from the income, and then claim the income

?

[MWil23]

Also, PSA:

I in no way am crying if I have to pay taxes, as that means I'm making a nice chunk of change on the side to help us reach our financial goals, but rather making sure I don't allocate it elsewhere and then am in trouble (more like semi inconvenienced and irritated) come tax season should I owe Uncle Sam.

[winitall]

15 minutes ago, MWil23 said:

Gotcha! I guess here is what I'm asking:

*Do I have to claim ALL of that income as MISC income and then separately itemize those deductions

or

*Do I deduct those deductions, subtract that from the income, and then claim the income

?

https://www.irs.gov/pub/irs-pdf/f1040se.pdf

That’s what you’ll end up filling out (or Turbo Tax for you). You’ll claim all of the income and deductions related to it on that form and then the net amount will flow through to your 1040 to be taxed.