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Rental conversion in December: Can I deduct expenses for second home with no rental income yet? (HOA, repair/improvement)
I purchased a new home in December 2021 which is going to be my primary residence going forward. For my old condo (now my second home), I had new flooring installed. The materials and labor invoices are dated from October through December 2021. I'm planning to convert this second home into a rental property. I already signed a contract with a property management company in December 2021, but the actual lease agreement with a tenant wasn't signed until January 2022. I'm trying to figure out the tax implications for my 2021 return and have a few questions: 1. In the eyes of the IRS, would my second property be considered a rental property as of December 31, 2021, even though I had no rental income for the 2021 tax year? 2. When can I start deducting expenses like HOA fees? December 2021? January 2022? Or not at all until it's officially rented? 3. I've read conflicting information about property improvements vs. repairs. The IRS website says: >...You can deduct the costs of **certain materials**, supplies, **repairs**, and maintenance that you make to your rental property to keep your property in good operating condition... > >...You may not deduct the cost of improvements. A rental property is improved only if the amounts paid are for a betterment or restoration or adaptation to a new or different use... What about my new flooring? Would it count as a repair or a property improvement? The carpet I replaced was from the 1980s, had water damage stains from a pipe burst, and was detaching from the baseboards. The new flooring is definitely a material part of the property and adds real value. Can I deduct these expenses for the 2021 tax year even without rental income? (Remember, property management agreement in December 2021, but tenant lease not until January 2022). If deductible, can I include both materials and labor costs?
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How to create an international invoice for digital illustration as a freelancer?
I'm a digital artist based in New Zealand, and I just got my first international client! A company from the US wants to buy usage rights for one of my digital illustrations and has asked me to send them an invoice for payment. The problem is, I've never created an invoice for international work before. I'm not GST registered in New Zealand, and I have absolutely no idea what my tax obligations are - either for local NZ taxes or for US federal/state taxes. Can I just send them a simple invoice through PayPal with the total amount we agreed on in USD? Do I need to include GST or some equivalent US tax? Or do I need to deduct something? Also, when they offered the payment amount, I'm not sure if they meant that's the total I'll receive, or if that's before any taxes. In NZ, I'm used to quoted amounts from GST-registered businesses being exclusive of GST unless they specifically say otherwise. This is my first real freelance gig with an international client and I really don't want to mess up the tax side of things. Any advice from those who've done this before would be super helpful! 🙏
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I'm a freelance illustrator in Australia who works with US clients regularly. Here's what I've learned: 1. Create a professional invoice that clearly states it's a "Tax Invoice" at the top 2. Include both your country's tax ID (if you have one) and note that you're not registered for GST 3. Specify that the amount is "GST/VAT exempt - exported service" 4. Make sure to keep copies of everything for your annual tax filing Most US companies are used to working with international contractors. They'll likely have you fill out a W-8BEN form which just confirms you're not a US person for tax purposes. Also, definitely check with your client whether the agreed amount is pre-tax or the final amount you'll receive. In my experience, when US clients quote a price, they mean the exact amount they'll pay you - no hidden deductions.
Thanks for this advice! When you say to keep copies of everything, how long do you typically hold onto those records? And has any US client ever withheld any taxes from your payments despite having the W-8BEN on file?
I keep all my records for at least 7 years, which is what our tax office recommends in Australia. It's better to be safe than sorry when it comes to tax documentation, especially for international work. I've never had a US client withhold taxes after properly filing the W-8BEN form. That's actually the whole purpose of the form - it certifies you're not subject to US tax withholding. In the rare case where a client does withhold something, you should contact them immediately as they've likely made an error in their accounting system.
Just a quick heads up - even though you're not charging GST to your US client, you still need to include all this income in your annual NZ tax return. The IRD will want to know about all your worldwide income. As your income grows from freelancing, you might want to look into whether you should register for GST voluntarily. There can be advantages if you're purchasing equipment or services for your business, as you can claim back the GST on those purchases. Also, keep track of your exchange rates when you receive payment. The IRD will want you to convert your USD income to NZD for tax reporting purposes. You can use the official IRD rates or keep records of the actual exchange rate when you received payment.
This is super helpful! Do you know if there's a specific form or section in the NZ tax return where international income needs to be reported differently than domestic income? I'm just starting out with US clients too.
Can I claim the refundable AOTC credit if I was part-time in my final semester?
I'm trying to figure out my eligibility for the American Opportunity Tax Credit (AOTC). I graduated with my Bachelor's degree in May 2023, and during my final semester (January-May), I was only enrolled part-time since I just needed a few classes to finish. I'm getting conflicting information from different tax software. I tried TurboTax first, and it calculated that I should receive $1000 from the AOTC. But when I entered the same information in FreeTaxUSA, it says I should get $0. FreeTaxUSA shows this message: "The 40% refundable part of the American Opportunity Credit is only available if you provided one half or more of your own support during 2023. You are still eligible for the nonrefundable part of the American Opportunity Credit no matter how you answer the question below." Since my parents provided more than half of my support in 2023, I initially thought I wasn't eligible for the refundable portion. But when I read the requirements more carefully, it says: "If you're under age 24, you can't claim the refundable American Opportunity Credit if all three situations below apply to you: 1. You were: * Under age 18 at the end of 2023, or * Age 18 at the end of 2023 and your earned income was less than one-half of your support, or * Over age 18 and under age 24 at the end of 2023 and a full-time student for five months or more and your earned income was less than one-half of your support. 2. At least one of your parents was alive at the end of 2023. 3. You're not filing a joint return with a spouse for 2023." Since I was NOT a full-time student for five months or more in 2023 (only part-time in my final semester), it seems like not all three situations apply to me. Is this a loophole that makes me eligible for the refundable portion? I don't want to claim something I shouldn't and end up owing it back later. Any advice on whether I should claim this $1000 refundable credit?
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Another thing to consider is whether you've already claimed the AOTC for 4 tax years. The AOTC can only be claimed for a maximum of 4 tax years per student. If you've been in school for more than 4 years or took some time off, you might have already maxed out your eligibility.
I've only claimed it for 3 previous tax years (2020, 2021, and 2022), so this would be my 4th and final year of eligibility. I did check that part!
Perfect! Then you should be good to go on that front. The 4-year limit trips up a lot of people, especially if they've taken gap years or had a non-traditional education path. Since this is your 4th year claiming it, make sure to keep extra good documentation in case of an audit.
Confused about one thing - if the student is claimed as a dependent, who actually gets to claim the AOTC? The student or the parent? My son is in college and we claim him as dependent.
If you claim your son as a dependent, then YOU (the parent) would claim the AOTC on your tax return, not your son on his return. The person who claims the student as a dependent gets to claim the education credits. The only exception is the refundable portion we're discussing here. If your son meets all AOTC qualifications but doesn't meet the disqualifying factors (like not being a full-time student for 5+ months), then he could potentially receive the refundable portion on his return even if you claim the non-refundable portion.
Scared to invest with Sweater Ventures - how will taxes work?
I've been researching different investment options lately and Sweater Ventures caught my attention. It seems like it could be a good opportunity, but honestly, I'm really anxious about jumping in because I have no clue how the tax situation works with this type of investment. I've never really invested in anything beyond my company 401k before, so this is all new territory for me. Will I get some kind of special tax form at the end of the year? Do I need to make quarterly payments? I heard something about capital gains but don't really understand how that works either. Has anyone here invested with Sweater Ventures or similar investment platforms? Any suggestions or general tax advice would be super helpful before I take the plunge. I'd really like to start building some investments, but the tax stuff is honestly intimidating me from getting started.
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Something nobody's mentioned yet - check if Sweater Ventures offers any tax guidance documents to their investors. Most reputable investment firms will provide some basic tax info specifically about their products. You might not need to figure everything out from scratch.
That's a really good point. Do they usually send these out at tax time or should I ask for something now before investing?
Most firms will provide some basic tax information when you first invest that explains the general tax implications. Then toward tax season (usually January-March), they'll send out more specific guidance along with any required tax forms. I'd recommend asking them for any tax overview documents before you invest, since that might help ease your concerns. They should be able to explain what forms you'll receive, approximate timing, and the general tax treatment of their specific investment products.
Newbie investor advice: Keep a separate savings account with about 20-30% of any gains you make for potential taxes. I learned this the hard way my first year investing when I had some lucky gains but spent all the money and then got hit with a big tax bill I wasnt prepared for.
This is solid advice! I'd also add that you should keep really good records of when you invested and how much. Makes tax time way less stressful.
VENTING - I want to quit my tax preparation job but I'm mid-season
I'm about ready to lose my mind. I've been working at a tax preparation chain for the past 2 months and I honestly don't think I can make it through the rest of tax season. The clients have been increasingly difficult - yesterday I had someone scream at me because they owed taxes instead of getting a refund. Like that's somehow MY fault?? I'm working 60+ hour weeks, the pay is nowhere near worth the stress, and my manager keeps adding more appointments to my schedule without asking. I only got this job because I thought it would look good on my resume (accounting student) but now I'm wondering if I should just quit. My mental health is suffering big time. Has anyone else been through this? Is it worth sticking out until April 15th or should I just walk away? I'm worried about burning bridges in the industry but I'm literally losing sleep over how much I dread going in every day.
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Just a different perspective - I quit mid-season last year and it was the best decision I ever made. Yes, it burned some bridges, but my mental health improved instantly. Found a bookkeeping job that pays almost the same but with normal 40-hour weeks and no screaming clients. Sometimes it's just not worth it. Just make sure u have something else lined up first! The job market isn't great right now.
Did you give notice or just walk out? I'm worried about how to handle it professionally if I do decide to leave. Also, were you able to use the tax experience on your resume effectively even though you didn't finish the season?
I gave one week's notice, which was less than they wanted but all I could handle mentally. I was honest but professional - just said the hours and stress were more than I anticipated and affecting my health. My direct supervisor was actually understanding even if upper management wasn't thrilled. I absolutely still list the experience on my resume! I just write the months I worked there (Jan-March) without drawing attention to the fact I left before April 15. During interviews, if asked directly, I'm honest that the 70+ hour weeks were not sustainable with my health, but I emphasize what I learned. Most interviewers seem to respect the honesty rather than seeing it as a red flag.
Has anyone tried using tax prep software to make the job easier? I been using ProSeries and it helped me speed up a lot of the basic returns. Can use the time saved on the easy ones to focus on the complicated clients.
Most tax prep places already require using their specific software. The software itself isn't usually the problem - it's the volume of clients, unrealistic appointment scheduling, and dealing with people who are stressed about money and taking it out on you.
QuantumQuest
One thing nobody's mentioned yet - make sure you're allocating expenses properly if you lived in the condo for part of December before moving to your new primary residence. You can only deduct expenses from the period when the property was held for rental purposes. Also, regarding the new flooring, if it was installed while you were still using it as your primary residence, before you made it available for rent, you might have to treat it differently. The timing matters a lot here.
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Dmitry Kuznetsov
AuthorThat's a good point I hadn't considered! I actually moved out completely in late November, and the flooring work was completed in early December before I signed with the property management company on December 15th. Would that affect how the flooring is treated? And would the HOA fees for December be fully deductible then?
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QuantumQuest
Since you moved out in late November and the flooring was installed in early December before signing with the property management company, that timing actually helps your case. The flooring work was done while the property was being prepared for rental use, not while you were using it as a personal residence. The HOA fees for December would likely be fully deductible since the property was no longer your personal residence during that month. Just make sure you have documentation showing you had moved out in November and that the property was being prepared for rental use in December. The property management agreement from December 15th is excellent supporting documentation of your intent to rent the property.
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Amina Sy
Don't forget about the possible passive activity loss limitations. If your adjusted gross income is under $100k, you can deduct up to $25,000 in passive rental losses against other income. This phases out as your AGI increases from $100k to $150k. If your AGI is over $150k, you generally can't deduct rental losses against other income - they get carried forward to future years.
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Oliver Fischer
This is super important! I got hit with this last year when I couldn't deduct my rental losses because my income was too high. The carry-forward helped eventually, but it wasn't what I expected when filing that first year with the rental property. Also, doesn't the fact that OP is actively participating in rental management affect this? Or does using a property management company automatically make it non-active participation?
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