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Depreciation on Trust Rental Property
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Dan Schumacher
Sep 24, 2016, 11:52:35 AM9/24/16
to
Hired a good sized accounting firm to do trust returns for three
child trusts. 2015 was the first year for the child trusts
because the grantor of the administrative trust that created the
child trusts passed away in early 2015.
After the death of the grantor of the admin trust, a home in the
mountains was converted to a rental property with ownership split
among the three child trusts. Because the average stay of the
Airbnb patrons was less than 7 days, we had to file as a Schedule
C business rather than a Schedule E item. The accounting firm
also stated that because we were filing as a Schedule C business
activity, the property had to be depreciated as a nonresidential
property with a 39 year useful life rather than as a residential
property with a 27.5 year useful life.
I was unable to find anything in any IRS Pub (964 and others)
that substantiated this statement. I know that logic has no
place in the tx code, but mine says that the asset class is
determined by the characteristics of the asset rather than by
which Schedule you are reporting on. Any comments? There were
no personal use days in 2015, and at most, 5 days so far in 2016.
A second item that I was uncertain about was how to prorate
things like insurance and property taxes. In my past experience
with first and last year allocating, I have prorated based on the
number of days the item was in service as a rental. However, the
accountant says that if the tax or insurance bill was paid after
converting the property into a rental, that we can deduct the
whole amount, not just a prorated amount. I can understand the
rationale for this approach, but I wondered what was considered
"best practice" if there was no official guidance.
Regards, Dan
--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
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child trusts. 2015 was the first year for the child trusts
because the grantor of the administrative trust that created the
child trusts passed away in early 2015.
After the death of the grantor of the admin trust, a home in the
mountains was converted to a rental property with ownership split
among the three child trusts. Because the average stay of the
Airbnb patrons was less than 7 days, we had to file as a Schedule
C business rather than a Schedule E item. The accounting firm
also stated that because we were filing as a Schedule C business
activity, the property had to be depreciated as a nonresidential
property with a 39 year useful life rather than as a residential
property with a 27.5 year useful life.
I was unable to find anything in any IRS Pub (964 and others)
that substantiated this statement. I know that logic has no
place in the tx code, but mine says that the asset class is
determined by the characteristics of the asset rather than by
which Schedule you are reporting on. Any comments? There were
no personal use days in 2015, and at most, 5 days so far in 2016.
A second item that I was uncertain about was how to prorate
things like insurance and property taxes. In my past experience
with first and last year allocating, I have prorated based on the
number of days the item was in service as a rental. However, the
accountant says that if the tax or insurance bill was paid after
converting the property into a rental, that we can deduct the
whole amount, not just a prorated amount. I can understand the
rationale for this approach, but I wondered what was considered
"best practice" if there was no official guidance.
Regards, Dan
--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2011) - All rights reserved. >>
<< ------------------------------------------------------- >>
Arthur Rubin
Sep 24, 2016, 2:49:16 PM9/24/16
to
On Saturday, September 24, 2016 at 8:52:35 AM UTC-7, Dan Schumacher wrote:
> Hired a good sized accounting firm to do trust returns for three
> child trusts. 2015 was the first year for the child trusts
> because the grantor of the administrative trust that created the
> child trusts passed away in early 2015.
>
> After the death of the grantor of the admin trust, a home in the
> mountains was converted to a rental property with ownership split
> among the three child trusts. Because the average stay of the
> Airbnb patrons was less than 7 days, we had to file as a Schedule
> C business rather than a Schedule E item. The accounting firm
> also stated that because we were filing as a Schedule C business
> activity, the property had to be depreciated as a nonresidential
> property with a 39 year useful life rather than as a residential
> property with a 27.5 year useful life.
Are you considering publication 946? It distinguishes residential rental property (which this is not, as short-term rental is not considered "rental") and nonresidential real property. You seem to be thinking this is residential nonrental property, which doesn't fit, which is true, but not a tax category.
> Hired a good sized accounting firm to do trust returns for three
> child trusts. 2015 was the first year for the child trusts
> because the grantor of the administrative trust that created the
> child trusts passed away in early 2015.
>
> After the death of the grantor of the admin trust, a home in the
> mountains was converted to a rental property with ownership split
> among the three child trusts. Because the average stay of the
> Airbnb patrons was less than 7 days, we had to file as a Schedule
> C business rather than a Schedule E item. The accounting firm
> also stated that because we were filing as a Schedule C business
> activity, the property had to be depreciated as a nonresidential
> property with a 39 year useful life rather than as a residential
> property with a 27.5 year useful life.
I could go further into the regulations, if you like, but P946 seems (to me) clear enough.
--
Arthur Rubin, CRTP, AFSP, Brea, CA
Dan Schumacher
Sep 26, 2016, 11:43:17 AM9/26/16
to
On Sat, 24 Sep 2016 14:47:50 EDT, Arthur Rubin
<ronni...@sprintmail.com> wrote:
>On Saturday, September 24, 2016 at 8:52:35 AM UTC-7, Dan Schumacher wrote:
>> Hired a good sized accounting firm to do trust returns for three
>> child trusts. 2015 was the first year for the child trusts
>> because the grantor of the administrative trust that created the
>> child trusts passed away in early 2015.
>>
>> After the death of the grantor of the admin trust, a home in the
>> mountains was converted to a rental property with ownership split
>> among the three child trusts. Because the average stay of the
>> Airbnb patrons was less than 7 days, we had to file as a Schedule
>> C business rather than a Schedule E item. The accounting firm
>> also stated that because we were filing as a Schedule C business
>> activity, the property had to be depreciated as a nonresidential
>> property with a 39 year useful life rather than as a residential
>> property with a 27.5 year useful life.
>
>Are you considering publication 946? It distinguishes residential rental property (which this is not, as short-term rental is not considered "rental") and nonresidential real property. You seem to be thinking this is residential nonrental property, which doesn't fit, which is true, but not a tax category.
>
>I could go further into the regulations, if you like, but P946 seems (to me) clear enough.
>
>--
>Arthur Rubin, CRTP, AFSP, Brea, CA
Arthur,
<ronni...@sprintmail.com> wrote:
>On Saturday, September 24, 2016 at 8:52:35 AM UTC-7, Dan Schumacher wrote:
>> Hired a good sized accounting firm to do trust returns for three
>> child trusts. 2015 was the first year for the child trusts
>> because the grantor of the administrative trust that created the
>> child trusts passed away in early 2015.
>>
>> After the death of the grantor of the admin trust, a home in the
>> mountains was converted to a rental property with ownership split
>> among the three child trusts. Because the average stay of the
>> Airbnb patrons was less than 7 days, we had to file as a Schedule
>> C business rather than a Schedule E item. The accounting firm
>> also stated that because we were filing as a Schedule C business
>> activity, the property had to be depreciated as a nonresidential
>> property with a 39 year useful life rather than as a residential
>> property with a 27.5 year useful life.
>
>Are you considering publication 946? It distinguishes residential rental property (which this is not, as short-term rental is not considered "rental") and nonresidential real property. You seem to be thinking this is residential nonrental property, which doesn't fit, which is true, but not a tax category.
>
>I could go further into the regulations, if you like, but P946 seems (to me) clear enough.
>
>--
>Arthur Rubin, CRTP, AFSP, Brea, CA
Thanks for your response. Is it possible, and what is the
impact, of using IRS Pub 534 instead of 946 to determine your
depreciation period? The property was owned by a relative from
1979 until he passed away in 2015. According to Pub 534, we
could elect to use a 19 year depreciation period because 2015 was
the first year we placed it in service as a rental. Does the
exclusion in 946 preclude this approach?
I guess I am just frustrated that the same piece of property can
be classed in two different categories simply on the basis of the
rental duration. It simply doesn't seem to be consistent with
the useful life determination.
Regards, Dan
Taxed and Spent
Sep 26, 2016, 1:03:46 PM9/26/16
to
ACRS recovery property."
The three child trusts acquired the property in 2015, well after the
1986 cutoff date for ACRS.
ira smilovitz
Sep 26, 2016, 1:23:47 PM9/26/16
to
Ira Smilovitz, EA
lotax
Sep 27, 2016, 12:35:56 PM9/27/16
to
I would guess that your "good sized accounting firm" gave this job to a young but inexperienced junior accountant to prepare the tax returns, one who knows how to read, and who read this in the IRS publication: "Your activity is not a rental activity if any of the following apply: The average period of customer use of the property is 7 days or less," but then didn't really know what that meant.
For one thing, it *doesn't* mean that your activity is a "trade or business" that should be reported on Schedule C. What it does do is help classify your activity for the passive loss rules.
I sure hope the tax preparers didn't report the net income (or loss) from the rental property as self-employment...!!
Did they report it as a passive activity?
For one thing, it *doesn't* mean that your activity is a "trade or business" that should be reported on Schedule C. What it does do is help classify your activity for the passive loss rules.
I sure hope the tax preparers didn't report the net income (or loss) from the rental property as self-employment...!!
Did they report it as a passive activity?
ira smilovitz
Sep 27, 2016, 6:09:30 PM9/27/16
to
On Tuesday, September 27, 2016 at 12:35:56 PM UTC-4, lotax wrote:
> I would guess that your "good sized accounting firm" gave this job to a young but inexperienced junior accountant to prepare the tax returns, one who knows how to read, and who read this in the IRS publication: "Your activity is not a rental activity if any of the following apply: The average period of customer use of the property is 7 days or less," but then didn't really know what that meant.
>
> For one thing, it *doesn't* mean that your activity is a "trade or business" that should be reported on Schedule C. What it does do is help classify your activity for the passive loss rules.
>
> I sure hope the tax preparers didn't report the net income (or loss) from the rental property as self-employment...!!
>
> Did they report it as a passive activity?
>
> --
The accounting firm got it right. It is a trade or business and it is reported on Schedule C. Schedule E reporting is an "exception" to the usual reporting rules for a business. You need to meet the definition of real estate rental which includes >7 day average lease period (as well as several other conditions) in order to report on Schedule E.
> I would guess that your "good sized accounting firm" gave this job to a young but inexperienced junior accountant to prepare the tax returns, one who knows how to read, and who read this in the IRS publication: "Your activity is not a rental activity if any of the following apply: The average period of customer use of the property is 7 days or less," but then didn't really know what that meant.
>
> For one thing, it *doesn't* mean that your activity is a "trade or business" that should be reported on Schedule C. What it does do is help classify your activity for the passive loss rules.
>
> I sure hope the tax preparers didn't report the net income (or loss) from the rental property as self-employment...!!
>
> Did they report it as a passive activity?
>
> --
Ira Smilovitz, EA
lotax
Sep 29, 2016, 7:45:16 PM9/29/16
to
So, if it's a trade or business and reported on Schedule C, is it also reported as a trade or business on Schedule SE, for self-employment tax?
ira smilovitz
Sep 29, 2016, 9:26:24 PM9/29/16
to
On Thursday, September 29, 2016 at 7:45:16 PM UTC-4, lotax wrote:
> So, if it's a trade or business and reported on Schedule C, is it also reported as a trade or business on Schedule SE, for self-employment tax?
>
> --
Yes.
> So, if it's a trade or business and reported on Schedule C, is it also reported as a trade or business on Schedule SE, for self-employment tax?
>
> --
Ira Smilovitz, EA
lotax
Oct 3, 2016, 6:48:12 PM10/3/16
to
I thought I heard somewhere that real estate rental income is "never" subject to self-employment tax. Is there some exception?
ira smilovitz
Oct 4, 2016, 2:17:13 AM10/4/16
to
On Monday, October 3, 2016 at 6:48:12 PM UTC-4, lotax wrote:
> I thought I heard somewhere that real estate rental income is "never" subject to self-employment tax. Is there some exception?
>
> --
There are exceptions - real estate rental income is generally defined as deriving from a rental with more than 7 day average rental period and one where significant personal services are not provided. Also, real estate rental income earned by real estate professionals is subject to self-employment tax. As with anything involving taxes, the devil is in the details.
> I thought I heard somewhere that real estate rental income is "never" subject to self-employment tax. Is there some exception?
>
> --
Ira Smilovitz, EA
Taxed and Spent
Oct 4, 2016, 10:22:01 AM10/4/16
to
On 10/3/2016 11:14 PM, ira smilovitz wrote:
> On Monday, October 3, 2016 at 6:48:12 PM UTC-4, lotax wrote:
>> I thought I heard somewhere that real estate rental income is "never" subject to self-employment tax. Is there some exception?
>>
>> --
>
> There are exceptions - real estate rental income is generally defined as deriving from a rental with more than 7 day average rental period and one where significant personal services are not provided. Also, real estate rental income earned by real estate professionals is subject to self-employment tax. As with anything involving taxes, the devil is in the details.
>
> Ira Smilovitz, EA
>
"real estate rental income earned by real estate professionals is
subject to self-employment tax" - I believe this is incorrect as a
> On Monday, October 3, 2016 at 6:48:12 PM UTC-4, lotax wrote:
>> I thought I heard somewhere that real estate rental income is "never" subject to self-employment tax. Is there some exception?
>>
>> --
>
> There are exceptions - real estate rental income is generally defined as deriving from a rental with more than 7 day average rental period and one where significant personal services are not provided. Also, real estate rental income earned by real estate professionals is subject to self-employment tax. As with anything involving taxes, the devil is in the details.
>
> Ira Smilovitz, EA
>
"real estate rental income earned by real estate professionals is
general rule. See 26 U.S. Code § 1402.
ira smilovitz
Oct 4, 2016, 1:34:22 PM10/4/16
to
On Tuesday, October 4, 2016 at 10:22:01 AM UTC-4, Taxed and Spent wrote:
> On 10/3/2016 11:14 PM, ira smilovitz wrote:
> > On Monday, October 3, 2016 at 6:48:12 PM UTC-4, lotax wrote:
> >> I thought I heard somewhere that real estate rental income is "never" subject to self-employment tax. Is there some exception?
> >>
> >> --
> >
> > There are exceptions - real estate rental income is generally defined as deriving from a rental with more than 7 day average rental period and one where significant personal services are not provided. Also, real estate rental income earned by real estate professionals is subject to self-employment tax. As with anything involving taxes, the devil is in the details.
> >
> > Ira Smilovitz, EA
> >
>
>
> "real estate rental income earned by real estate professionals is
> subject to self-employment tax" - I believe this is incorrect as a
> general rule. See 26 U.S. Code § 1402.
>
> --
I guess you didn't read all the way through 1402(a)(1): "there shall be excluded rentals from real estate and from personal property leased with the real estate [...] unless such rentals are received in the course of a trade or business as a real estate dealer ..."
> On 10/3/2016 11:14 PM, ira smilovitz wrote:
> > On Monday, October 3, 2016 at 6:48:12 PM UTC-4, lotax wrote:
> >> I thought I heard somewhere that real estate rental income is "never" subject to self-employment tax. Is there some exception?
> >>
> >> --
> >
> > There are exceptions - real estate rental income is generally defined as deriving from a rental with more than 7 day average rental period and one where significant personal services are not provided. Also, real estate rental income earned by real estate professionals is subject to self-employment tax. As with anything involving taxes, the devil is in the details.
> >
> > Ira Smilovitz, EA
> >
>
>
> "real estate rental income earned by real estate professionals is
> subject to self-employment tax" - I believe this is incorrect as a
> general rule. See 26 U.S. Code § 1402.
>
> --
Ira Smilovitz, EA
Arthur Rubin
Oct 4, 2016, 2:50:15 PM10/4/16
to
On Tuesday, October 4, 2016 at 10:34:22 AM UTC-7, ira smilovitz wrote:
> I guess you didn't read all the way through 1402(a)(1): "there shall be excluded rentals from real estate and from personal property leased with the real estate [...] unless such rentals are received in the course of a trade or business as a real estate dealer ..."
You're talking about different things. "Real estate dealer" and "real estate professional" are _different_ terms of law.
> I guess you didn't read all the way through 1402(a)(1): "there shall be excluded rentals from real estate and from personal property leased with the real estate [...] unless such rentals are received in the course of a trade or business as a real estate dealer ..."
In general, real estate rental income is passive; it's non-passive (or, at least, losses are allowed) for real estate professionals, and subject to self-employment tax for real estate dealers.
--
Arthur Rubin, CRTP, AFSP, Brea, CA
ira smilovitz
Oct 5, 2016, 9:20:40 AM10/5/16
to
On Tuesday, October 4, 2016 at 2:50:15 PM UTC-4, Arthur Rubin wrote:
> On Tuesday, October 4, 2016 at 10:34:22 AM UTC-7, ira smilovitz wrote:
>
> > I guess you didn't read all the way through 1402(a)(1): "there shall be excluded rentals from real estate and from personal property leased with the real estate [...] unless such rentals are received in the course of a trade or business as a real estate dealer ..."
>
> You're talking about different things. "Real estate dealer" and "real estate professional" are _different_ terms of law.
>
> In general, real estate rental income is passive; it's non-passive (or, at least, losses are allowed) for real estate professionals, and subject to self-employment tax for real estate dealers.
>
> --
> Arthur Rubin, CRTP, AFSP, Brea, CA
>
> --
My bad, then. I was using "professional" as a colloquialism for "dealer".
> On Tuesday, October 4, 2016 at 10:34:22 AM UTC-7, ira smilovitz wrote:
>
> > I guess you didn't read all the way through 1402(a)(1): "there shall be excluded rentals from real estate and from personal property leased with the real estate [...] unless such rentals are received in the course of a trade or business as a real estate dealer ..."
>
> You're talking about different things. "Real estate dealer" and "real estate professional" are _different_ terms of law.
>
> In general, real estate rental income is passive; it's non-passive (or, at least, losses are allowed) for real estate professionals, and subject to self-employment tax for real estate dealers.
>
> --
> Arthur Rubin, CRTP, AFSP, Brea, CA
>
> --
Ira Smilovitz, EA
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