It’s that time of year again. There’s a chill in the air, and our thoughts start turning to all things merry and bright. But for landlords, there’s another consideration that you’ll want to think about as you sip your spiced cider: taxes.
Yes, we know, taxes aren’t the most exciting thing. But paying attention to your tax strategy –and getting everything in order before the end of the fiscal year can make a big difference when it comes to tax time and the amount of tax that you’ll end up owing.
If you’d like to save money on your upcoming tax return, here’s a look at some strategies you can employ before the year’s end, along with some deductions that you may be eligible for when you file your return next year.
End of Year Tax Strategies
Now that the end of the year is almost here, there are a few things that you can do to help keep your tax bill manageable.
Note that the benefits of tax strategies will vary, depending on your individual situation. Make sure you consult a CPA or consider carefully how a strategy will benefit you before employing it.
With this in mind, here’s a look at some year-end strategies that you may want to employ.
- Consider Deferring Your Income
Income is taxed in the year that you receive it. True, you can’t always postpone income, and you may not want to! However, if you do have this option, you could essentially postpone taxes on this amount for a year’s time. For example, if you’re self-employed, you could delay billing until later in the year so the income doesn’t arrive until after Jan 1st. Another way to defer income is to postpone the sale of assets until next year so that capital gains tax would be owed next year, rather than this year.
Of course, if you believe you’ll be in a higher tax bracket next year, then you’ll want to take the opposite approach. In this case, you may want to accelerate income into this year, so you can pay tax on it while you’re still in a lower tax bracket.
- Make Sure You Have Enough Deductions
Another strategy is to defer expenses. If you’ve had a lot of expenses at your property this year, and have already accrued enough deductions, then it may make sense to delay some deductible expenses, like maintenance, until next year (January). On the flip side, if you don’t have enough deductions, it might make sense to move forward with repairs and maintenance this year, rather than delaying them, so you have some deductions lined up to offset your income.
- Consider Donating to Charity
Feeling charitable? Another last-minute tax strategy to accelerate your deductions is to make a charitable contribution before the end of the year. This will give you another tax write-off when it’s time to file in April.
- Contribute the Maximum to Retirement Accounts
Another strategy is contributing to tax-deferred retirement accounts. This is especially valuable if you have a company-sponsored retirement account where your employer will match your contributions. Contributing the maximum amount (or the highest amount that you’re able to) before the end of the year is the best strategy for most people. With a retirement account, you’ll be able to defer taxes until you retire or withdraw the funds. While you usually have until the April 15th filing deadline to make contributions into these accounts, there’s no harm in starting early. See the difference between tax-free and tax-deferred retirement accounts.
- Consider Selling Off Underperforming Investments
Here’s a tip if you own stocks or mutual funds. One key year-end strategy is known as “loss harvesting.” This involves selling off investments that aren’t performing well so that you’ll incur a loss, which you can use to offset any taxable gains you’ve made during the year. Losses offset gains dollar for dollar, making them an especially valuable deduction.
What Counts as Rental Income?
Before we dive into available deductions for landlords, let’s quickly define what counts as income. The IRS definition is: “Any payment you receive for the use or occupation of property.”
This includes (but isn’t necessarily limited to):
- Rent Payments
Of course, the standard monthly rent payments you receive are to be considered income. But not only the cash, checks, or bank transfers. Other payments are also considered to be part of your income and must be included on your tax return as well.
- Expenses Paid by Tenants
If your tenant is not required to pay for certain services but pays them as part of their rent, that is considered income.
- Services Traded for Money
If a tenant agrees to “work off” part of their rent, that amount is still considered income.
- Security Deposits That You Keep
While the portion that you return to your tenant is not considered income, any portion that you keep must be included . This means if you keep part or all of the security deposit during the year because the tenant does not live up to the terms of the lease, you would include that amount as income during the year.
Deductions for Landlords
Fortunately for landlords, the IRS offers a number of deductions that can be used to offset your income.
While tax time isn’t until April 15, getting a head start doesn’t hurt. Starting early will help you to make decisions that will impact your tax bill, such as determining what fiscal year you should try to fit expenses into. And of course, remember to keep good records. All receipts should be kept in a safe place ready for when tax time rolls around.
Here are some expenses that you may be able to deduct:
- Interest
Interest on your mortgage can be deducted, something that can add up considerably over the years. In fact, many landlords will find that their mortgage interest is their biggest deductible. Additionally, Interest on credit cards used for the rental property can also be deducted.
- Repairs and Maintenance
Repairs can also be deducted. Repairs are things which are considered to be necessary and reasonable. This includes things such as painting, fixing gutters, repairing leaks, and replacing broken windows, along with anything else that is done to maintain the value of the property and keep it in good, operating condition.
Maintenance tasks are fully deductible as well. This includes lawn care, snow removal, HVAC services, and tree pruning.
On the other hand, things that could be considered improvements; are treated differently. Improvements are things that will add to the value of your property in some way. They are deductible as well, but not all at once. Instead, they must be recaptured over a number of years.
- Travel
Whether you live in the same city as your rental, or out of state, some travel expenses are allowed. While this doesn’t mean your dream vacation of a lifetime is deductible, it does mean that many costs associated with travel to and from your rental property can be deductible –as long as they were for business purposes.
- Local Travel
For a local rental property, you can deduct gas, oil, and vehicle upkeep. Or, use the IRS’ standard mileage rate and claim a specific amount per mile.
- Long Distance Travel
If you’re a long-distance landlord, travel costs add up even more quickly. Airfare, hotel costs, and 50% of meal expenses can all be deducted. However, keep in mind that IRS auditors closely inspect all deduction claims for overnight travel so make sure you have proper documentation, both for the purpose of your travel and your expenses, before you claim this deduction.
Always ensure that you follow all the rules when it comes to deducting travel expenses, and keep good records. In order to deduct an expense, you’ll need to document the write-off, so keep your receipts and bank statements pertaining to any work that was done on the property.
- Insurance
Insurance premiums are also deductible. Any insurance policies that you purchase for your rental including fire, flood, theft, and liability are all included. If you have employees, workers compensation and health insurance are also deductible.
- Taxes
Many landlords don’t realize this, but property taxes can usually be deducted as well. These taxes will vary, depending on where you live and what your property is worth. Just keep in mind that there’s a new limit on this deduction; property tax deductions cap out at $10,000, or $5,000 if married filing separately, for property taxes, state and local income taxes, or sales taxes combined.
- Professional Fees
Any services rendered for your property investments, including legal fees, property management, and accounting can all be deducted.
- Contractors or Employees
The wages you pay contractors can be deducted, as can the wages of any employees you have hired to help with your rentals.
- Utilities
If you pay the utilities for your rental, they are deductible. This includes electric, fuel, water and sewer, trash, and recycling.
- Pass-Through Deduction
Thanks to the Tax Cuts and Jobs Act, most landlords qualify for a new pass-through deduction. With this deduction, you may be able to deduct up to 20% of your rental income, 2.5% of the cost of your rental property, as well as 25% what you pay your employees (if you have them) –depending on your income.
- Depreciation
Depreciation is another deduction that landlords can take. Here’s how it works: the IRS considers your rental property to be a depreciating asset, which means you’re able to recover the cost of the rental over a period of time by claiming depreciation annually on your tax return. Residential rentals are depreciated over a 27.5-year period. While this can be a valuable deduction, there is a downside. The depreciation that you claim must be recaptured at the time of sale. So at the end of the day, it’s just deferring this expense until a later date. However, keep in mind too that depreciation is not optional, the IRS requires landlords to claim it.
- Improvements and Upgrades
In some cases, the cost of work done on a rental isn’t deductible –at least not all at once. Improvements will need to be capitalized, and deducted over a number of years.
Some examples of improvements include: additions, landscaping, a new roof, a security system, water heaters, flooring, and insulation. See IRS Publication 527.
Taxes can be confusing and difficult to navigate, especially when you start adding multiple properties to your portfolio. In many cases, it makes sense to enlist the help of an accountant to take on this job on for you. Not only will this allow you to step back, and stress less about the work involved with deciphering tax returns, a good accountant will also help to alert you to available deductions and strategies that you might not be aware of, which can help you to save on your tax bill when tax time comes again.
Need more tax tips? Take a look at Filing Your Taxes When You’re a Landlord.
Note: This article is intended to inform and to guide. It is not meant to serve in place of tax advice from a licensed tax professional or attorney. Please consult a tax professional for information about your tax situation and deductions that you’re eligible for.
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