The 5 tax rules a military landlord needs to know before renting out their home

The nature of military lifestyle means frequent moves, uncertain surroundings, and the only thing that is constant is change.

Service Members invest in real estate for the same reason anyone does.  It is a nice thought to be building equity in your name rather than someone else’s, it is difficult to find rental properties in desirable areas, at a decent rate, that will take our furry children, housing on post is nonexistent or the wait time is ridiculously long.  

Owning your own home is a feeling unlike any other.  It can be freeing,(you can finally paint those walls in the dining room red) or it can be daunting – you’re the one that has to fix that leaky roof.

A home purchase is often the largest single investment people make.  Here are a few tax rules if you have taken the plunge to purchase a home and decided to rent it out because of a PCS move.  

  1. You will need to file a tax return in both the state your now rental property is located, and your home state, if either one of those states has an income tax.  Yes, even if you have a loss for the year.
  2. A residential rental property must be depreciated. That means a portion on of the basis is deductible each year.  The life of a residential rental property is 27.5 years.  Repairs and maintenance can be written off, but major improvements must also be depreciated. I have a worksheet on my resources page that can help calculate depreciation on your rental property.
  3. The amount that can
    be depreciated is either the fair market value (FMV) at the time you place it is service OR your cost basis in the property, 
    whichever is less, minus the value of the land.
  4. The day you place it service is the first day it is advertised as for rent, not when you first have tenants.
  5. Active duty military personnel have a special 10-year suspension on the look-back period for the sale of a primary residence.  It is possible that you own a home and for example: live it in for 2 years, rent it out for 7 and then sell the home, that the only portion of the sale that would be taxable is the portion that was subtracted for depreciation (which is required). The maximum tax rate of this portion is 25% and could be less if your tax bracket is lower. Without this special provision, the gain would all be taxable as capital gain.  

The single biggest mistake I see on self-prepared tax returns with rental properties is the failure to calculate and take depreciation as a deduction on the taxpayer’s Schedule E. I have a worksheet in my resources library if you are interested in calculating your depreciation expenses for the first 9 years of your rental property.

What tax topic do you have the most questions about?  Let me know!  Tweet at me! 

 

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