Can You Deduct Tenant Damage and Cleanup Costs on Your Taxes?

In this episode of Tax Tuesday, Anderson Advisors attorneys Eliot Thomas, Esq., and Toby Mathis, Esq., tackle a variety of listener questions related to tax deductions and property management. They discuss the implications of evicting tenants and the possibility of deducting repair costs, as well as how homeowners can deduct home office repairs. You’ll hear about  the process for amending tax returns to include rental properties and explore the tax consequences of receiving large gifts from non-U.S. citizens. Additionally, they cover topics like the advantages of S-corp versus C-corp structures, the requirements for achieving real estate professional status, and the nuances of short-term property sales, including 1031 exchanges. Tune in for expert insights that could impact your tax strategy!

Submit your tax question to taxtuesday@andersonadvisors.com

Highlights/Topics:

• "We rented our house last year due to damages caused by the tenant violations of the agreement. We evicted them." "The tenant abandoned the property with their belongings." "With proper judgment and the sheriff's help, we evicted them and cleaned the property. The tenant caused too much damage. Can we include the cost of fixing it on our taxes?" - yes, and we have two categories, repairs or improvements.
• "I work from home. I already take deductions for my home office. If there is a repair in the house like plumbing or an appliance repair, am I able to take a percentage of that repair off as a deduction?" - As a general matter, yes.
• "In 2022, I bought and rented a rental property, but I never put the property on my tax return. Can I now add this property to my tax return and take advantage of the tax deductions, cost of ownership, et cetera? Is there a limitation on how far back someone can amend a tax return or add a rental property purchase in the past?" - yes, you can. Is there a limit to how far back? Yes, I'll hit the limit first, three years from the date that you filed.
• "My parents live in Singapore and are not US citizens. They want to give me and my kids $200,000.”“They have not previously gifted us any funds. Will any of us need to pay tax on this?" - Generally speaking, I don't know of a tax necessarily if you have non-US citizens giving cash gifts over to their children or family.
• "Is there a different procedure to buy a residential multifamily with a pizzeria?" "Is there a different procedure to buy a multifamily with the pizzeria running downstairs?""We have our long-term rental properties with LLC. How should we proceed with this? Can we do a cost segregation study and take bonus depreciation on this type of property and take advantage of the passive deductions?" - For both, you can go ahead and do a cost segregation study, see if it would be in your favor—usually it is
• "What type of activities can I log toward REP (real estate professional) status, as a real estate agent? For example, working at home on my website, market research, advertising. Does having a home office mean my time driving to and from showings counts as time? Is education either required or optional?" - If you meet the criteria, then that turns it from passive to non-passive. if you spend over 750 hours in a particular trade or business
• "What are the tax consequences if I sell a property in less than a year of purchase? Does the same apply to manufactured homes? And would they be able to do a 1031 exchange if there's profit on the sale?" - What was your intent? Was it to flip? That is a different scenario than short-term gains. Manufactured homes need to look at state laws.
• "Why should I open an S-corp versus a C-corp?" - There are many differences to consider.
• "Can you please explain the 100-hour material participation in detail? You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual, including individuals who didn't own any interest in the activity for the year." "For example, if I materially participated in my rental activity for 100 hours during a tax year, can I claim 100% tax deductions on my losses, expenses, and my business activity under this test alone?" - No, it doesn’t work that way. You need REP status.

Resources:

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