Colorado laws pertaining to rental property are the same as the regulations in the federal tax code. In order to simply filing, Colorado initiated a plan used by several other states that requires the federal return to be attached to the state return as part of the filing. This resolves the confusion that had existed between differences in federal and state laws. Rental property income and expense deductions should be shown on schedule E of the federal tax return (form 1040). Any proceeds from the gain or loss on investment property should be reported on schedule D of the federal return.
Rental Property Income and Expenses
Rental property expenses include all payments toward the managing and maintenance of the real property. This includes: property upkeep and maintenance, gardening service, small repairs, and utilities (if paid by the landlord). These are individually deducted at the end of the year as items on schedule E of the federal tax return. A separate schedule of income and expenses should kept for each rental property. Individuals that own property are on a “cash-basis,” unless their business utilizes the accrual method of accounting. Cash basis means that the deduction for expenses should occur in the year they are actually paid. The same rule applies to income. Income for each property should be recorded separately and only included on the tax return in the actual year received.
Capital improvements are “major” improvements on the rental property, such as a new wall, room addition or kitchen remodel. Federal tax code requires that all capital improvements be depreciated over 27.5 years using “straight-line” depreciation, which means an “even” amount deducted each year. For example, a $20,000 expenditure for a bathroom remodel would be deducted each year at $727.27 ($20,000 divided by 27.5). “Net capital expenditures” are added to the cost basis of a rental property. Net capital expenditures refer to the cost of the capital improvements, less the depreciation on the property. For example, if the net capital expenditures on a kitchen remodel total $15,000, and the original cost of the property was $200,000, the cost basis for gain or loss would be $215,000.
Rental Property Sale
When a rental property is sold, the adjusted basis of the rental should be deducted from the “net sale price” of the rental. The net sale price refers to the gross sale price, less any expenses for escrow, title and real estate agent commissions. For example, if a rental sells for $250,000, and there were $15,000 in closing costs, the net sale price would be $235,000. If the adjusted basis of the property was $100,000, the gain reported on the federal tax return would be $135,000.
The tax treatment of rental properties can involve multiple schedules including income and expenses, capital gains, and depreciation. You should consult with a tax professional when filing a return that includes rental property. For all expenditures, including capital improvements to the property, keep receipts to support any deduction as well as a copy of any cancelled checks.
I graduated with a degree in Finance from Cal Poly Pomona and have held an active Brokers License for over 30 years. I also owned an accounting and tax practice for ten years. I'm an expert in all matter relating to mortgages, accounting, small businesses and taxation, and investing.