New Rental
Good evening Dealmakers,
I recently acquired a rental property via upgrading my home. I now have my old residence for rent. And of course, a couple questions.
1) I'm somewhat unclear, what is the best way to hold property, in a LLC or a corp?
2) If I dont form an entity to hold the propertly, will I be able to write off repairs, interest, etc on the rental home on my personal taxes?
3) What documentation is required to report items for the rental property. Is it as simple as supplying a receipt. Is it ok if the item is paid for out of a personal checking account?
thanks
Illum!
Good questions here. If you want to form an entity, for rentals I would recommend an LLC. They are somewhat easy to create, and offer very good legal liability protection.
If you form an LLC, the LLC will file a seperate tax return (Form 1065), and supply you (the member) a form K-1. That K-1 will report your share of the LLC's income, which will be used to file your personal return. However, if you are the only member of the LLC, the IRS views the LLC as a disregarded entity, and the LLC will not have to file a return at all. The income will be reported by you directly on your schedule E (see following paragraph).
If you do not form a seperate entity, you will still be able to take your deductions. You will use schedule E to report your rental income and deductions.
I would definitely setup a seperate checking account, in the LLC or your name, depending on what you decide. It is not required if you do not incorporate, but will simply make it easier for you to keep track of your expenses. If the LLC does not have it's own checking account, it could be considered comingling, and pierce the corporate veil.
Definitely keep all receipts. I've never been through an audit, but obviously without receipts you will have a very difficult time proving your expenses. As far as mileage to and from your rental property for maintenance, showing to potential renters, etc, keep a log of your mileage. One thing I am unsure of is this. Say you purchase a new refrigerator for a rental property. Can the IRS request to visit the property, to make sure the refrigerator is in fact there, to make sure you don't really have the fridge in your personal house? I've always wondered about that. But, as I've said before, my advice is to keep it honest. It is way to easy to make money in rei to have to cheat.
Hope this helps, kind of rambled...