Tax season is the most serious time of the year for rental property investors. If you’re in the rental housing market, then you’re probably aware of your responsibility to report your rental income on your annual tax return. To submit your tax return file correctly and get a tax deduction, follow our tax tips for landlords.
According to the Internal Revenue Service (IRS), rental income refers to the payments you receive for your rental unit’s use or occupation. It includes all payments, from monthly rent collections to security deposits. Essentially, everything that you receive should be reflected in your tax return.
Sounds complicated, right? Well, it doesn’t have to be.
One common mistake that first-time and seasoned landlords make is failing to take advantage of the rental property tax deductions that are available to them. They aren’t aware of the expenses that they can write off. As a result, they end up paying more than they have to.
5 Tax Tips for Landlords: Tax Advice for First Time Landlords
If you are going to file taxes the first time, our tax advice for first time landlords will be helpful to pay an extra tax that you can deduct. The truth is, the rental housing market offers an abundance of tax benefits. Here’s a look at some of the tax tips for landlords that you and your property management service provider can do to reduce your taxes and ultimately maximize your savings:
#1 Take Advantage of Rental Property Tax Deductions
You don’t have to pay more tax as a landlord than you need to. You can claim a variety of deductions on your taxes, such as travel expenses, income, insurance, and much more. Let’s take a look at some of the deductions you can take advantage of when filing your taxes:
Maintenance and Repairs
Repairs refer to the activities done to maintain the condition of your rental property. This category doesn’t embrace upgrades and aesthetic improvements since they aren’t considered essential. The allowable deductions include activities such as fixing the roof, repairing gutters, replacing broken doorknobs, and so on.
Travel and Transportation Expenses
Many landlords don’t live near their investment properties. If you’re self-managing your rental property, you can deduct your travel expenses from your taxes, including airfare, hotel costs, car rentals, gasoline, and so on. You may even be able to deduct the expenses that you incurred for meals during long-distance travel.
You can’t manage your rental property on your own. Eventually, you will have to hire accountants, investment advisors, attorneys, and other professionals. All of these fees can be deducted as operating expenses. Additionally, if you hired a single-family property management company to handle the day-to-day demands of managing your rental unit, you can write off that expense, too.
Are you making mortgage payments? Don’t forget to deduct the interest when you file your taxes. It is the most significant deductible expense that landlords can take advantage of. You can also deduct the interest from purchases made for property improvements. It also covers the interest on loans used to obtain rental property.
While your rental property may appreciate in value, the IRS views it as if it were depreciating. Depreciation isn’t a one-time deduction but is claimed by spreading out the cost across several years. This is known as segmented depreciation. Improvements made to the property can depreciate over a shorter time — typically five years.
Other Tax Deductions
There may be other tax deductions available to you. To reduce your taxes, it’s best to take advantage of all of them. These include:
- Personal property
- Home office
- Independent contractors
- Self-employed health insurance
- State and local sales tax
A professional property manager can help you identify the tax deductions that you can claim.
#2 Look Into the Qualified Business Income Deduction
Deducting Qualified Business Income is one of the most important tax tips for landlords. Implemented in 2018, the Qualified Business Income Deduction (QBI) allows rental property owners to benefit from another tax break. Also known as the pass-through income deduction, it is an income tax deduction and not a rental deduction. Landlords may deduct as much as 20% of their rental income, 2.5% of the net cost of their investment property, and 25% of their employee’s wages. The QBI deduction is scheduled to expire in 2025.
#3 Double-Check Your IRS Form
One of the most important tax tips for landlords that make no mistakes. The IRS can impose penalties if there are errors in your form. Before submitting your income tax return, be sure to double-check everything and ensure that the information is correct. Otherwise, the IRS may send you a notice for errors due to calculating mistakes. Carefully reviewing your income tax return can save you from getting in trouble with the IRS, or worse, getting audited.
How should you file your taxes based on ownership?
- If you own the property. File the IRS Schedule E.
- If you own the property with a co-owner. Both of you should file your tax return separately using IRS Schedule E.
#4 Ensure That Your Deductions Are Legitimate
It’s understandable that landlords would want to take advantage of as many tax breaks as possible, however, it is also important that those deductions are legitimate. Keep in mind that the IRS will scrutinize tax returns with many deductions. Avoid passing off unnecessary expenses as deductions. For instance, don’t claim a deduction for travel if the purpose of your trip was to go on a vacation, and not to check on your property.
In the event that you get audited, it’s crucial to have the proper documentation on hand. If you can’t support your deductions, it’s better not to claim them in the first place.
#5 Consider Filing a Tax Extension
Filing your taxes is a tedious and time-consuming process, especially if you don’t have an accountant. If you find yourself struggling to meet the deadline set by the IRS, you can file an extension through Form 4868. This gives you an additional six months to file your income tax return.
Keep in mind that the extension only grants you more time to file your income tax return, not more time to make your payments.
Tax season doesn’t have to be stressful. It also doesn’t have to take most of your money. With the landlord tax tips above, you can reduce your taxes and maximize your savings when you file your income tax return each year.
As a landlord, you should make a consistent effort to save money. With Luxury Property Care, you can make informed decisions about the future of your investment property. Our in-house team of accountants is prepared to help you during tax season so that you won’t have to pay more than what’s needed.