Enrolled Agent > EA - Part 1: Individuals > Unit 9: Rental and Royalty Income > Flashcards

Unit 9: Rental and Royalty Income Flashcards

Prepare tax reporting for rental and royalty income, including allowable deductions and passive activity rules. (52 cards)

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1
Q

What is rental income?

A

Any payment received for the use or occupancy of physical property.

Rental income must be reported as part of gross income, and the reporting method may vary based on the type of rental activity.

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2
Q

On which form are rental and royalty activities generally reported?

A

Schedule E

(Form 1040)

There are exceptions to this rule, but generally, rental and royalty activities are declared on Schedule E.

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3
Q

Which types of expenses can rental property owners deduct?

A
  • Interest on mortgage payments and property taxes
  • Maintenance, lawn care, repairs, and cleaning services
  • Expenses for advertising vacancies
  • Utilities covered by the homeowner
  • Insurance premiums
  • Depreciation
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4
Q

When must advance rent be reported as income?

A

In the year it is received, regardless of the period covered or the accounting method used.

Advance rent is any amount received before the period it covers and must be included in income when constructively received.

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5
Q

True or False:

A refundable security deposit is immediately considered income for the landlord.

A

False

A refundable security deposit is not considered income unless it is forfeited by the tenant.

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6
Q

Under what rule can prepaid insurance premiums be deducted all in the year paid?

A

The 12-month rule

For cash basis taxpayers, prepaid expenses (like insurance) can be deducted in the year paid if the benefit does not extend beyond the earlier of 12 months or the end of the following tax year.

This rule allows deduction if the benefit does not extend beyond 12 months from the first effective date or the end of the following tax year.

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7
Q

How should a landlord report property or services received in lieu of rent?

A

As rental income at the fair market value of the services or property.

If a price is agreed upon in advance, that price is deemed the fair market value unless there is evidence to the contrary.

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8
Q

Fill in the blank:

A property owner cannot claim a ‘loss’ of rental income for any period of time when the property remains _______.

A

unoccupied

However, necessary expenses can be deducted if the property is available for rent and efforts are made to attract tenants.

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9
Q

What is the recovery period for depreciating residential rental property?

A

27.5 years

Most residential rentals are depreciated over this period using the straight-line method.

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10
Q

What are the main factors determining how much depreciation a landlord can deduct?

A
  • The property’s basis
  • The recovery period for the property
  • The depreciation method used
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11
Q

True or False:

The cost of land is depreciable.

A

False

Land is not depreciable because it does not wear out, become obsolete, or get used up.

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12
Q

What must be done when converting a personal residence to rental use at any time other than the beginning of a tax year?

A

Divide expenses between rental use and personal use.

Only the portion of expenses for the rental period is deductible, and the property is considered “placed in service” on the date of conversion.

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13
Q

How is the basis for depreciation determined when converting a personal home to a rental property?

A

It is the lesser of the fair market value or the adjusted basis on the date of conversion.

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14
Q

What is the maximum Section 179 deduction for 2025?

A

$2,500,000

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15
Q

True or False:

Section 179 deductions can be applied to residential rental properties.

A

False

Section 179 deductions are not allowed for residential rental properties; they apply to certain tangible personal property used to furnish lodging and improvements to nonresidential buildings.

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16
Q

What is a mixed-use building classified as if 80% or more of the annual gross rental income is from residential rentals?

A

Residential rental property

If 80% or more of the annual gross rental income is from residential rentals, the entire building and improvements are depreciated over 27.5 years.

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17
Q

Fill in the blank:

A property owner can expense the cost of _______ but must capitalize and depreciate substantial improvements.

A

repairs

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18
Q

What is the de minimis safe harbor rule for tangible property?

A

Taxpayers can elect to expense tangible property costing no more than $2,500 per invoice or item in the year they are used or consumed.

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19
Q

What is the safe harbor election for small taxpayers (SHST) regarding rental properties?

A

It allows landlords to deduct expenses if the total amount paid during the year for repairs, improvements, and similar expenses does not exceed the lesser of $10,000 or 2% of the unadjusted basis of the building.

The SHST only applies to buildings with an unadjusted basis of 1 million or less.

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20
Q

What is the special $25,000 loss allowance for real estate rental activities?

A

It allows landlords who actively participate in managing their rental properties to deduct up to $25,000 of losses from their nonpassive income.

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21
Q

Define ‘active participation’ in the context of rental real estate activities.

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A

It involves making management decisions, such as deciding rental contracts and approving repairs. The property owner must own at least 10% of the rental property.

“Active participation” is not the same as “material participation”. Material participation is a much higher standard.

22
Q

What is the income phaseout threshold for the full $25,000 passive loss allowance for rental real estate (for Single or MFJ filers)?

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A

$100,000 of modified adjusted gross income (MAGI) or less.

23
Q

What is the maximum special loss allowance available for taxpayers with a MAGI of $100,000 or less?

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A

$25,000

The full $25,000 loss allowance is available for taxpayers, whether single or MFJ, whose modified adjusted gross income (MAGI) is $100,000 or less.

24
Q

Define:

Modified Adjusted Gross Income

(MAGI)

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A

A taxpayer’s adjusted gross income with certain deductions added back in.

These deductions may include IRA contributions, rental losses, student loan interest, and qualified tuition expenses.

25
What is the **maximum rental loss allowance** for a **married taxpayer filing separately** who **lived apart** from their spouse the entire year?
$12,500 ## Footnote This allowance is available only if the taxpayer’s MAGI is $50,000 or less.
26
# True or False: A taxpayer filing MFS who lived with their spouse during the year can deduct passive rental losses against nonpassive income.
False ## Footnote If the taxpayer lives with their spouse at any time during the year and is filing MFS, they cannot use any passive rental losses to offset nonpassive income.
27
Who is **not allowed** to claim the **special loss allowance**?
* A limited partner in a business activity * A property owner with less than 10% ownership in a rental activity * A trust or corporation ## Footnote The $25,000 special allowance is available only to natural persons, although disregarded grantor trusts are permitted.
28
What happens to **rental losses** that **cannot be deducted** due to **limitations**?
They can be **carried forward indefinitely** and used in subsequent years, subject to the same limitations.
29
What is the **phaseout threshold** for the **special loss allowance** when **MAGI exceeds $100,000**?
The “loss allowance” **decreases by $1 for every $2 above the threshold**. ## Footnote If MAGI reaches $150,000 or higher (or $75,000 if filing separately when married), the full $25,000 allowance is phased out.
30
How must expenses be **allocated** if a taxpayer **rents only a portion** of their property?
Expenses must be allocated **between rental and personal use**, essentially treating the property as two separate units. ## Footnote Costs related to the rental portion can be claimed as rental expenses on Schedule E.
31
What are the two common **methods** for **dividing expenses between rental and personal use**?
* The number of rooms in the house * The square footage of the house
32
# True or False: A taxpayer can deduct expenses proportionate to their share of ownership in a rental property.
True ## Footnote If a taxpayer has partial ownership of a rental property, they can deduct expenses proportionate to their share of ownership.
33
If a **family member** lives in a **rental property** without paying rent, how is that use **classified for tax purposes**?
It counts as **personal use**. ## Footnote Rental expenses will be no more than the taxpayer’s total expenses multiplied by the fraction of days rented at a fair rental price.
34
What defines a property as a '**residence**' for tax purposes?
If it is used for **personal purposes** for more than the greater of (1) **fourteen days**, or (2) **10% of the total days it is rented** at a fair rental price.
35
What happens if a rental activity is **not-for-profit**?
The rental income is **not reported on Schedule E**, and the taxpayer **cannot deduct a loss**. ## Footnote Any unused expenses cannot be carried forward to the following year.
36
What is the **15-day rule** for rental income?
If a taxpayer rents a residence for **fewer than 15 days a year**, the rental income is **not taxable**, and related expenses are not deductible. ## Footnote This rule applies to both main and vacation homes considered a 'residence'.
37
What **criteria** must be met for a taxpayer to be classified as a **real estate professional**?
* Provide more than one-half of total personal services in real property trades or businesses. * Perform more than 750 hours of services during the tax year. * Own more than 5% of any activity for it to be considered under the real estate professional rules.
38
# True or False: Rental income and expenses for properties where the owner provides substantial services must be reported on Schedule C.
True ## Footnote Substantial services include daily maid service, laundry service, or regular breakfast service, applicable to hotels, motels, and similar businesses.
39
Where should **personal property rental income** be reported if the taxpayer is **not in the business of renting**?
Line 8l of Schedule 1 | (Form 1040) ## Footnote Expenses may be entered as an adjustment to income on Schedule 1, Line 24b.
40
How are **royalties** typically reported on a tax return?
Reported on **Schedule E** and are not subject to self-employment tax. ## Footnote If the taxpayer is actively involved in production or maintenance, they may be subject to self-employment tax and reported on Schedule C.
41
# Fill in the blank: \_\_\_\_\_\_\_ must report royalty income on Schedule C, and such income is subject to self-employment tax.
Self-employed writers, musicians, and inventors
42
How is royalty income treated for a **beneficiary** who **inherits** an intellectual property asset?
The inherited intellectual property is a capital asset to the beneficiary, but the royalty payments are ordinary income reported on Schedule E and are not subject to self-employment tax. ## Footnote This applies when the beneficiary did not create the asset themselves.
43
**Improvements** made to rental property are generally classified as what **three types**?
* Betterments * Restorations * Adaptations ## Footnote **Betterments** – enhance the property's value or adapt it to a different use. **Restorations** – return the property to its normal operating condition. **Adaptations** – prepare the property for a new or different use.
44
What is **royalty income**?
Income received for the use of **another person’s property**, such as patents, copyrights, or natural resources. ## Footnote Generally reported on Schedule E (Form 1040).
45
# True or False: Lease cancellation fees are classified as rental income.
True ## Footnote The payment is included in the year received regardless of the taxpayer’s accounting method.
46
Can property owners **deduct local taxes** that increase property value?
No, these are **capital expenditures** added to the property's basis. ## Footnote Only taxes for maintenance or repair, or interest related to construction financing, can be deducted.
47
When can a landlord start claiming **depreciation on rental property**?
Once the **property is put into use** for generating income. ## Footnote Depreciation stops when the cost or basis is fully recovered or the property is no longer in use.
48
What **types of property** can qualify for the **Section 179 deduction** under current law?
* Tangible personal property used predominantly to furnish lodging . * Certain improvements to nonresidential real property. ## Footnote Examples include HVAC systems, roofs, fire protection and alarm systems, and security systems in nonresidential properties like office buildings and hotels.
49
What distinguishes a repair from an improvement for tax purposes?
A **repair** keeps an asset in good working condition without adding value or prolonging its life, while an **improvement** is a major expenditure that goes beyond normal repairs and must be depreciated. ## Footnote Repairs can be expensed immediately, whereas improvements are capitalized and depreciated over time.
50
# True or False: Rental activities are generally considered passive activities regardless of the owner's participation.
True ## Footnote Passive activity losses can only offset passive income, and excess losses are carried forward to future years.
51
How are **below-market rentals** to family members treated for tax purposes?
They are considered **'not-for-profit' rentals**, and the taxpayer cannot claim any rental expenses that exceed the rental income. ## Footnote Not-for-profit rental income is reported on Form 1040 as 'other income.'
52
When must **royalty income** be reported on Schedule C?
When a taxpayer is actively involved in the **production or maintenance** of the property generating the royalties, such as **self-employed writers** and **musicians**.
EA - Part 1: Individuals
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