Tax Tip of the Week | Categories of Real Estate

Tax Tip of the Week | Aug 29, 2018 | Categories of Real EstateIf one were to ask the typical American taxpayer to name the various types of real estate, one might expect to hear (1) residential and (2) commercial. That would not be a bad answer, unless that taxpayer were dealing with the Internal Revenue Service.In that case, one might expect to hear some of the following responses:1.    Principal residence2.    Second home3.    Vacation home4.    Residential rental property5.    Commercial rental property6.    Investment property7.    Business propertyEach of the above property categories may be treated very differently from one another from a tax perspective. Some properties could even be classified as being in multiple categories.Adding to the confusion, some of these categories may be further broken down into subcategories.The subcategories may include:1.    Passive (losses may be limited depending upon your participation)2.    Non-passive (losses are allowed)3.    Self-rental (gains are treated as ordinary income; losses as passive)4.    Inherited (typically basis is the fair market value as of the decedent’s date of death)5.    Gifted (receiver gets carry over basis from donor)6.    Personal (no losses are allowed)Generally, rental income is taxable income (some exceptions exist on your home and second home). Expenses are not so easy. Some may be deducted and others may need to be added to the property’s basis and depreciated. Deductions for vacation homes that have both personal and rental use may be limited and require additional calculations. Interest has its own set of rules.Please understand that you need to be able to substantiate your property category and your deductions. Your property category may make a huge impact if the property is sold. Sound confusing? It is! Significant tax dollars may be at stake.Thank you for all the wonderful input from last week's Tax Tip of the Week; Common Misconceptions.  We apologize for the confusion on the technical error related to replying to the email.  Keep the feedback coming, here is the link to last week; Common Misconceptions, and a link to tell us about the misconceptions you have come across; markb@bradstreetcpas.com.Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.This week's author – Norman S. Hicks, CPA--until next week.