ode923

This one is driving me crazy. New client lives in Arizona, but is a limited partner of a Virginia partnership that owns and rents properties in Virginia. So the partnership distributes the net rental income to the partners/owners. Virginia will give you a credit if you paid income tax in Arizona on that same income, but only if that income is "qualifying" income. What is qualifying income? According to Virginia, that's earned income, business income, and capital gains. In previous years, the client's (now retired) tax professional always claimed this credit in Virginia. But I don't consider rents from a partnership to be "earned income", "business income", or capital gains. "Earned income" usually means wages or business income. And "business income" usually means income from your trade or business. A passive, minority, limited partner who receives real estate distributions from a partnership hardly seems to fit the bill. Am I correct in my thinking? Before I tell my client to pay Virginia tax for the first time ever, I want to make sure I'm not royally goofing up here. What is driving me crazy are: 1. For the past several years, the former tax professional always claimed this credit. Incorrectly?! 2. The partnership's K-1 allocates all of the client's income as being QBI income. So maybe it is "business income" after all? 3. Virginia partnerships normally must withhold taxes for their non-resident partners. This partnership says it doesn't do that for my client because he's "exempt" from that requirement. And the reason he's "exempt", they say, is because he doesn't have any Virginia income tax liability. But the only reason he doesn't have Virginia income tax liability is because he's always been (incorrectly) taking this out-of-state tax credit! If anyone is more familiar with this, please chime in.........thank you!

Hi all. This is a new one for me in my small practice: Client is a carpenter/handyman by trade and as a side investment project he bought a property and renovated it and remodeled completely by himself, and then began renting it out. It's a residential rental. Certainly the cost of all of the materials he used to improve the house are to be depreciated using the standard straight line 27.5 year method. But what about the tools and equipment? To complete this job, he rented about $2,000 in tools/equipment and bought another $5,000 in tools/equipment. He wants me to depreciate it all. The $2,000 in equipment he rented I am adding into the basis of the property. What about the $5,000 in equipment he bought? He started the project in summer 2017 and it was ready for rental by spring 2018. The IRS rule on this is: Equipment used to build capital improvements. You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. Pub. 946 and Pub. 551 My hunch is this will end up being a relatively small amount that will be added to the basis. My reaction to the IRS rule is to take the equipment cost of $5,000, divide it by 27.5, and then pro-rate that amount based on the duration of time the equipment was used. For example, if the equipment was used for 6 months, I'll pro-rate it by dividing the amount by 2. Then, I will add that figure to the basis. Still, a few things are driving me crazy about this: 1) Is 27.5 the correct depreciable life for equipment used in this context? 2) Not every tool was bought or used the same day. To keep myself sane, I'm going to group the tools by month of purchase. Before I drive myself anymore crazy over this, perhaps someone more familiar with depreciating tools and equipment in this specific context can help. Thank you in advance.

Thank you cbslee and DANRVAN. I have reluctance applying this grant as income on a Schedule E. On Schedule E you report rental income. The IRS defines rental income as: 1) Rent 2) Payments to cancel a lease 3) Expenses paid by tenant 4) Property or services received as rent 5) Security deposits kept if tenant doesn't live up to terms of the lease That's it. In this case, it's a grant that was awarded to the client for revitalizing a dilapidated property that they rent out. Farm Income (Schedule F) is far more broad and includes a whole bunch of possible categories. Schedule E is quite narrow in comparison--rents, and royalties, and that's about it. Does that change your answer at all?

Hi all. Happy tax season to everyone. A client bought a property in an economically depressed area. He remodeled and upgraded it, and now rents it out. Thanks to the economic revitalization he provided by refurbishing the house, the state gave him a grant for his investment/improvement in that property. The state then issued him a 1099-G with the value of the grant in Line 6. My client paid another professional who is familiar with these grants to help prepare and file that grant application. The client will want me to report both the grant and the grant-preparation expense on Schedule E, as income and expense, respectively. The client is arguably a real estate professional, but he hasn't really claimed that designation in years past. My reaction is to report the grant as "Other Income" on Line 21 of the 1040, not Schedule E. As for the professional fee to obtaining the grant, I'm not sure at this point how I'll deal with that. Has anyone dealt with something like this before? Thanks in advance!