Tax questions

April 06, 1999

Members of the Maryland Association of Certified Public Accountants are answering readers' tax questions through April 15.

My wife and I began to rent some property last fall. The property is in Pennsylvania and we will be filing [in] Maryland. We have tracked expenses, etc. How do I handle this on both my federal and state returns?

Rental income and expenses from the Pennsylvania property should be reported on Schedule E of your federal income tax return (Form 1040). You are allowed to deduct expenses such as advertising, cleaning, insurance and mortgage interest. You may also be eligible to depreciate any building or other property (such as furniture, appliances, etc.) that is utilized in the rental activity. See IRS Publication 527, Residential Rental Property, for more information on what to report and how to report it.

It is important to note that, if you have a rental loss, you may be limited as to whether you can deduct the loss, and if so, to what extent. See the section regarding passive activities in IRS Publication 527, Residential Rental Property, and Form 8582, Passive Activity Loss Limitations.

Assuming you are a Maryland resident, Pennsylvania taxes nonresidents on the net income from the use of the property located in Pennsylvania. Your rental income (or loss) should be reported to Pennsylvania on Form PA-40, Pennsylvania Individual Income Tax Return, as a nonresident. Since you are a Maryland resident, Maryland will tax this rental income (if any) as well, although you may be eligible for a credit for taxes paid to Pennsylvania. Attach Maryland Form 502CR to your Maryland Individual Tax Return (Form 502), to calculate the credit for the income taxes paid to Pennsylvania on the rental income.

Daniel F. McGuire, CPA, Arthur Andersen

The above advice is for general purposes only and is not intended as legal, accounting or tax advice. Specific situations may vary.

Pub Date: 4/06/99

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