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Effective: December 1, 2006 |
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20.25.20.25ar1 - Rental Income (Archive) |
Archived: June 1, 2009 |
Rental property is property the client owns and rents to others, but where the client does not live. This may include separate living quarters in the same building, such as a duplex. Income from rental property may be earned income or unearned income depending on what method is being utilized.
For information on rental income from people living with the client, see Roomer /Boarder Income.
The following policy regarding rental income is only for MA and GAMC.
Deduct allowable self-employment expenses from both earned and unearned rental income.
Note: Earned income disregards and deductions when calculating total income are only available for earned rental income. See Income Calculation for more information about earned income disregards and deductions.
There are two ways to obtain the percentage of the property that is rented:
1. Divide the number of rooms that the client rents out by the total number of rooms in the entire building.
2. Divide the square footage that the client rents out by the total square footage in the entire building to obtain a percentage of the property that is rented.
Multiply the allowable deductions by the percentage of the property that is rented.
Follow the General Provisions and the following when calculating self-employment expenses for MA Method A:
l Count income from rental property as:
n Earned income when the client spends an average of at least 20 hours per week maintaining or managing the property.
n Unearned income when the client spends less than 20 hours per week maintaining or managing the property.
l Allow the following expenses as deductions for rental property from gross receipts:
n Real estate tax.
n Insurance.
n Utilities.
n Interest.
n Upkeep and repairs.
l Allow a deduction for upkeep and repairs to existing structures or equipment.
n Only consider minor corrections to an existing structure as a repair.
n Do not allow expenses for adding to or replacing existing structures or equipment to increase the value of the property.
Use the greater of the following for this deduction:
n Up to $103 per year.
n 2% of the Estimated Market Value (EMV) found on the county tax assessment form.
Follow the General Provisions and the following when calculating self-employment expenses for Method B:
l Count income from rental property as:
n Earned income for each month the client spends an average of at least 10 hours per week maintaining or managing the property.
n Otherwise count rental income as unearned income.
l Allow the following expenses as deductions for rental property from gross receipts:
Note: Do not carry excess expenses over to other tax years. Do not use excess expenses to offset other income.
n Real estate tax.
n Insurance.
n Utilities.
n Interest.
n Advertising expenses.
n Lawn maintenance.
n Snow removal costs.
n Property management fees paid to a third party.
l Allow a deduction for upkeep and repairs to existing structures or equipment.
Note: There is no limit to the amount of this deduction.
n Only consider minor corrections to an existing structure as a repair.
n Do not allow expenses for adding to or replacing existing structures or equipment to increase the value of the property.
n If it is uncertain whether an expense is for repair or replacement, follow your agency's procedures to submit a policy question to HealthQuest.
Example:
Tim owns rental property that has damage to the roof.
Action:
Allow the expense to repair only the damaged area of the roof as a deduction from the rental income Tim receives for that month.
If Tim decides to replace the entire roof do not allow this expense as a deduction from the rental income.
Example:
Jill resides in an LTCF and has a life estate interest in a home. She is receiving rental income monthly. Jill's authorized representative determines that the house is very drafty and expensive to heat in the winter due to the homes' very old windows. The authorized representative has all of the windows in the house replaced and requests that this expense be deducted from Jill’s rental income.
Action:
This is a capital expenditure and cannot be allowed as a deduction from Jill's rental income.
l If the rental property income is part of a self-employment enterprise, annualize gross rental income and expenses to determine the average monthly countable income.
l If it is not part of an enterprise subtract the allowable expenses paid in a month from the gross rental income received in the same month.
Note: If the allowable expenses paid in a month exceed the gross rental income in the same month, subtract the excess expenses from the next month's gross rental income.
n Continue to do this as necessary until the end of the tax year in which the expense is paid.
n If there are still excess expenses after applying the expenses to the future month’s rental income, subtract the remaining excess expenses from the gross rental income received in the month prior to the month the expenses were paid.
n Continue to do this as necessary to the beginning of the tax year involved.
Example:
Alfred is living in an LTCF. He owns a life estate that is currently being rented for $600 a month. Half of his property tax of $900 is due in May. Alfred pays the $900 in May.
Action:
Deduct $600 of the property tax payment from the rental income received in May. There is a balance of $300 that can be deducted from the rental income received in June.
Example:
Eugene owns a farm consisting of 67 acres and a farm house. He lives in a nursing home and rents out 46 tillable acres to a local farmer. He does not rent out his home. His grandson lives in the farm house for free. $2,070 farm rental income is received twice per year on only the 46 tillable acres.
Action:
Allow property taxes and insurance paid as deductions prorated based on the percentage of total property that is rented out.
Since the farm house is not income producing, do not allow upkeep and repairs or any other expenses associated exclusively with the house as deductions.