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Don't forget that you should also factor in any improvements you made to the land during those 3 years. Even things like a survey, running utility lines, clearing trees, or building a driveway can increase your basis. I've owned several properties and the IRS has never questioned improvement costs as long as I had receipts.
Does fencing count as an improvement? I put up a fence around my property last year and I'm planning to sell in a few months.
Yes, fencing absolutely counts as a capital improvement that adds to your basis. It's considered a permanent addition to the property that adds value. Make sure you keep all receipts showing what you paid for materials and installation. If you did the work yourself, you can include the cost of materials but not your own labor. Other things people often forget to include are land clearing, grading, retaining walls, drainage systems, and even certain permits or impact fees if they were required for the improvements. Every dollar you can document as an improvement will reduce your taxable gain when you sell.
Anyone know if paying down the mortgage principal early counts toward your basis? I paid extra $12k toward my land loan to reduce interest.
No, that doesn't count toward basis. Your basis is your purchase price + acquisition costs + improvements. Just paying down your loan faster doesn't change that calculation.
For what it's worth, I've been doing my duplex taxes on my own using FreeTaxUSA for the past three years. It's WAY cheaper than TurboTax but still handles Schedule E for rentals perfectly fine. I was paying $500+ to a CPA before that, but realized my situation is pretty straightforward. The software walks you through all the rental income, expenses, and depreciation stuff step by step.
Does FreeTaxUSA handle state taxes too? And is it easy to import previous year's info if you're switching from TurboTax?
FreeTaxUSA does handle state taxes, though unlike federal (which is free), there's a small fee for state filing - around $15 depending on your state. Way cheaper than TurboTax's $50+ for state filing. As for importing from TurboTax, unfortunately, you can't directly import the TurboTax file. You'll need to manually enter your information the first year. However, it's not as bad as it sounds since you can use your previous year's return as a guide. After that first year, FreeTaxUSA will remember your info and make future years much easier.
Honestly, with just a single rental unit in a duplex, TurboTax should be fine. I've used it for 5 years with my triplex (live in one, rent two). Just make sure you keep good records of your expenses and know which ones need to be split between personal and rental use. The only time I'd pay for a professional is if you have multiple properties or complicated situations like 1031 exchanges.
What deductions are people commonly missing with rental properties? I always worry I'm leaving money on the table even with TurboTax.
14 Going back to the original question about hobby vs self-employed income, one thing nobody's mentioned is the self-employment tax. If you file as self-employed, you'll pay an additional 15.3% tax on your net profit for Social Security and Medicare. For hobby income, you don't pay this tax. With your small amount of income, the self-employment tax might actually cost you more than what you save from deducting the developer fee. Run the numbers both ways before deciding.
1 I hadn't even considered the self-employment tax! That's a really good point. If I go the self-employed route, I'd be paying 15.3% on the profit after expenses. But if I go the hobby route, I'd pay regular income tax on the full $160 without being able to deduct the $125 developer fee. Let me see... If I file as self-employed, my profit would be $160 - $125 = $35, and I'd pay 15.3% on that plus my regular income tax rate. If I file as a hobby, I'd pay just my regular income tax on the full $160. Hmm, this actually makes the hobby route seem better financially in my case. I need to calculate this more precisely. Thanks for pointing this out!
14 You're welcome! That's exactly the kind of calculation you should be doing. Just to add one more thing: remember that with self-employment, you can deduct half of the self-employment tax from your income. That helps a little. Also, if you think your app income might grow in the future, establishing it as a business now could be beneficial long-term, especially for building retirement savings through a SEP IRA or solo 401(k) once the income justifies it. Just something to keep in mind if you see potential for this to grow beyond covering just the developer fee.
7 Has anyone used TurboTax for this kind of situation? I have a similar issue with small YouTube ad revenue, and I'm wondering if TurboTax handles this well or if I should use something else.
19 I used TurboTax for my Etsy shop income last year (about $500). It handled both options fine, but I found the questions for the Schedule C to be easier to follow than trying to figure out where to put hobby income. They walk you through the business vs. hobby test and help you choose which approach makes sense.
This happened to me last year! Check your final paystub to see what was ACTUALLY withheld throughout the year. In my case, the W2 was wrong but the payroll system had been taking the correct amount all along. My company issued a W2-c (corrected W2) about 2 weeks after I reported the problem. You'll need to wait for the corrected form before filing your taxes.
So if the W2 is wrong but the actual withholdings were correct all along, does the person need to do anything special when they file? Like report the discrepancy somewhere?
Once you receive the corrected W2-c, you just use that form instead of the original incorrect W2 when filing your taxes. You don't need to report the discrepancy or include any special forms explaining the situation. The corrected W2-c will show the original incorrect amounts, the correct amounts, and the difference between them. This makes it clear to the IRS what changed and why. Just make sure you're using the final corrected numbers when completing your tax return.
Anyone know how long employers typically take to issue a corrected W2? My company found an error similar to this a few weeks ago and said they'd send corrected forms, but I'm still waiting and getting anxious with the filing deadline coming up.
Javier Gomez
Make sure you also check if you received any forms related to HCTC eligibility that might have been automatically reported to the IRS! My husband got a similar notice because his former employer sent him a PBGC (Pension Benefit Guaranty Corporation) statement that triggered HCTC eligibility flags in the IRS system, even though we never claimed the credit.
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Emma Wilson
ā¢Yes! This happened to me too with PBGC forms. The IRS computer systems automatically flag accounts when they receive certain forms, even if you don't claim the associated credits.
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Malik Thomas
Always respond to IRS notices!! Even if you think it's a mistake or doesn't apply to you. I ignored a similar notice once thinking it would be cleared up automatically and ended up with penalties and interest before I finally resolved it.
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