Accountant for Landlords and Small Buildings

Schedule E and the owner-occupied two-family

If you live in one unit and rent the other, only the rental share of mortgage interest, property tax, insurance, utilities and building repairs goes on Schedule E. The rest is personal. We split it by square footage or another reasonable method and keep it consistent year to year, because changing methods is what draws questions.

Depreciation and repairs vs. improvements

• Depreciation: residential rental buildings are depreciated over 27.5 years. Land is not depreciated, so the purchase price has to be split between land and building. Depreciation you could have taken reduces your basis when you sell, even if you never claimed it, so skipping it costs you twice.
• Repairs: fixing what broke, patching a roof leak, repainting between tenants, is generally deducted in the year you pay.
• Improvements: a new roof, a gut renovated kitchen or bath, or replacing a building system is capitalized and depreciated.
• De minimis safe harbor: you can elect to deduct items costing up to $2,500 per invoice or item instead of depreciating them.

Passive loss limits

Rental losses are passive. If you actively participate, own at least 10% and help make management decisions, you can deduct up to $25,000 of rental loss against wages and other income. That allowance shrinks once modified AGI is over $100,000 and is gone at $150,000 ($50,000 to $75,000 if married filing separately). Losses you cannot use carry forward until you have rental profit or sell the property, so they need to be tracked every year.

New York City points

Simply owning and renting out your own property is not subject to the NYC Unincorporated Business Tax. If you own a co-op or condo you live in, the city's co-op and condo property tax abatement applies only to a primary residence, and units owned by an LLC or other business do not qualify, so moving your own unit into an LLC can cost you the abatement.

Should the rental be in an LLC?

An LLC is mainly a liability question. A single-member LLC does not change your income tax and still reports on Schedule E. In New York it adds formation costs and the publication requirement, and moving a property you already own into one can raise mortgage, insurance and transfer tax questions. Talk to your attorney and lender first; we handle the tax side.