It's that time of year again, where landlords and property managers alike are scrambling to collect receipts, gather paperwork, and start the arduous process of preparing and filing taxes.
But while tax time isn't exactly the highlight of the year for most, for savvy landlords, the good news is that there's a lot that you can do to reduce your tax bill. The IRS rules tend to favor those who invest in rental property, and, as tax software provider TaxSlayer puts it, landlords reap the benefits of rental property tax deductions -more than tenants do.
For many landlords, though, the challenge isn't paying the tax bill itself, but rather knowing where to start. For first time landlords especially, taxes can be confusing, and even downright overwhelming.
At Renters Warehouse, our goal is to help simplify the process of property management; allowing landlords to benefit from the rewards of owning rental property. For this reason, we've put together this short guide to help first-time, and even experienced landlords, with the process of filing taxes -while at the same time allowing you to ensure that you're not missing out on any valuable deductions that are available.
While many landlords opt to go through an accountant, if you only own one or two properties -or simply prefer to do it yourself, here are a few tips that will help you to get started.
Report Rental Income and Expenses
If you rent out property, you'll normally need to report all of your rental income on the IRS Form 1040 Schedule E (Supplemental Income and Loss From Real Estate).
Go ahead and list your total income -this includes rental income, advance rent, and security deposits; as well as expenses, and depreciation for each rental property that you own on the appropriate line of Schedule E. For help calculating depreciation, see the IRS instructions. You'll also want to record all of the expenses related to the property. The net rental income, that is, your income after expenses will give you an income -or in some cases a loss figure, that will be calculated on Schedule E.
Don't Forget These Deductions
Most landlords are aware that they can deduct the cost of repairs to the rental, but did you know you can also deduct interest on your mortgage -or even credit cards used to pay for expenses or repairs for the property? The IRS allows a wide range of tax deductions for rental properties, and as a landlord you may qualify for a number of them.
Here's a look at a few expenses that landlords can deduct:
- Depreciation
- Mortgage Interest
- Other Loan Interest
- Taxes
- Utilities (If you pay them)
- Repairs
- Maintenance
- Insurance
- Travel Expenses (To and from the property)
- Legal and Professional Fees
- Advertising Costs
- Casualty Losses
- Operating Expenses
- Employee Compensation
- Gifts (Up to $25 per tenant, vendor, or employee per year)
Keep Good Records
Landlords who keep good records and detailed summaries of the expenses associated with their rental properties are the ones that benefit the most when tax time rolls around.
Not only will good record keeping make filing much easier, it will also help you to save as much as possible on your tax bill. And, in the case of an audit, having good records will allow you to you prove an expense that you've claimed. If you're audited and cannot provide evidence to support items on your return, you could end up facing additional taxes and penalties.
Good records include evidence of all income and expenses -all receipts, canceled checks or bills, as well as proof of travel expenses incurred for the property.
Remember Depreciation Recapture
When it comes to your property, the IRS considers the building to be depreciating in value. This means that you can claim depreciation on the structure -but not the land, by spreading it out over a number of years, usually 27.5.
Depreciation is often one of the largest deductions that can landlords take, and can make a big dent in your tax owed. But take care! This depreciation must be recaptured later on, if you sell the property for more than the depreciated value down the road. This means that you may have to add some or all of the depreciation that you've taken over the years, back into your taxable income in what is known as "recaptured depreciation." Be sure to plan ahead for recapture before you sell, especially if you own rentals in an area where property is appreciating in value.
Consider Tax Software
Prefer to go it alone? Unless you have a working knowledge of the tax code, you'll want to seriously consider investing in tax software, like TaxAct. This software helps to break down the often-confusing terminology that's used on tax forms, into everyday language, allowing you to complete your tax return in a fraction of the time it'd otherwise take. It'll also alert you to potential deductions that you can take.
You Can Carry Losses Forward
Suppose one of your rental properties has a net loss for the year. That loss can be netted against the profit and loss of all your other rentals. However, if the total for all of your properties is negative, that loss may or may not be deductible against the rest of your income -this is because of what's known as "passive activity loss limitations." Rental loss limits vary depending on your modified adjusted gross income and how you file.
But here's another rule that benefits landlords. Rental losses that are limited by passive activity loss limitations can still be carried forward to the following tax year. This allows you to offset rental profits that you might make the next year.
You can use IRS form 8582 to calculate passive activity loss limitations, and track rental losses that accumulate every year for your properties. Learn more about passive activity loss limitations.
Consider Setting Up the Property As an LLC
It's a little late for this one for this year, but you could keep this one in mind for the next. Many landlords prefer to set up LLCs for each rental that they own. This helps to protect their assets in case of a lawsuit. An LLC can also offer tax advantages, such as pass-through taxation. This means that the LLC doesn't pay any taxes, and instead, income made passes through to the LLC's owners. Be sure to consult with a CPA to see if an LLC would be advantageous for your tax situation.
It may not be the most exciting time of the year, but landlords and property investors do enjoy a variety of write-offs during tax time. Just make sure you keep your receipts, and good records to support your deductions. You'll be able to simplify the filing process -and reduce your tax bill.
For more information on available deductions for landlords, be sure to download Renters Warehouse's FREE tax guide: The Primary Tax Advantages Gained From Rent Estate. Start saving more on your tax bill!
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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