Tax Season Tips for Landlords
As a rental property owner, you’re obliged to declare your rental income on your tax return. Under the IRS definition, rental income is the payment given to property owners for the use of their rental home. This includes:
● Regular rent payment
● Advance rent payment
● Security deposits
● Tenant payment for lease cancellation
● Expenses paid by the tenant
● Property or services received in lieu of money as rental payment
Whether you’re a new or experienced property owner, taxes can be daunting. If you make a tax mistake, it might have a negative impact on your rental business. The pandemic has brought with it financial uncertainties together with the expiry of eviction moratoriums and increasing rents.
This makes it more crucial to look for more ways to earn tax savings and maximize the tax deductions.
Aiming to increase your rental income is also possible through proper tenant selection. You can achieve this by thoroughly reviewing your renter’s background before signing the rental agreement.
Here are tips to keep more of your rental income in your account:
1. Main Tax Deductions for Landlords
It’s best to be aware of the types of IRS deductions that you can claim. This allows you more tax savings. Deductions include the following:
● Rental real-estate depreciation. The cost of investing in your rental can be recouped from depreciation. As a landlord, subtracting part of the total property cost is allowed as a deduction over several years.
● Insurance. Just like your investment expense, your insurance premiums for your rental unit can also be tax-deductible. Landlords are permitted to deduct the costs of insurance such as landlord liability insurance and flood insurance.
● Repairs. Damages that landlords and tenants may have caused can’t be prevented. However, they’re also counted under tax deductions on the year the repairs are finished.
Keep in mind that the repairs categorized as deductible must be necessary, ordinary, and reasonable in repair charges. Some examples of these types of repairs are:
● Rental property repainting
● Replacement of broken windows
● Gutter repairs
There are just among the deductions that landlords are allowed to claim for their rental business.
2. COVID Resources
The event in recent years has been chaotic for both landlords and tenants. A lot of property owners have adapted to the environment and exercised some landlord practices in the social distancing era. Virtual property showings had become the norm.
With the sense of normalcy returning, a lot of these rental practices have gone back to the pre-pandemic ways. But the rental rates, tenant turnover, and evictions have largely remained uncertain.
A report done by the Harvard Center for Housing Studies revealed that small, self-managing landlords only earned 50% of the expected rent income at the time of the pandemic.
The COVID-19 relief package in 2021 gave out $25 billion as rental assistance. This made it possible for landlords to apply for funds as the representatives of their tenants. Even if the direct payments had long since passed, other resources are still available that can aid in the tax returns.
You can check out Benefits.gov to find resources that can support landlords in the aftermath of COVID-19. This page will show editorials, webinars, forums, and news sources pointing to the challenges confronted in 2021 and 2022.
3. Essential Records Required in The Tax Season
Storing your records properly is crucial if you’re intent on making tax deduction claims. Being organized when it comes to landlord records can save you from the tax season stress. If everything is arranged, it will be easy to discover your receipts, find deductible expenses, and get your tax returns ready.
Here are important records to keep in order:
● Your properties’ leases or rental agreements
● Legal documents that include court appearances, fines, or inspection reports necessary for the property
● Property permits
● Business-related records
● Insurance policies
● Loan documentation
● Past tax records
● Real estate investment documents that include property titles or deeds
Other documents that landlords should also consider are short-term records. These can be income and expense reports available from the latest tax year.
These short-term records are:
● Interest on mortgage
● Legal fees for attorneys
● Receipts for repair
● Receipts for paid rent
● Receipts for utility costs (if applicable)
● Rental property advertising fees including listing costs
● Rental business credit cards
While it sounds a lot to track, the effort is well worth it. Having these documents on hand can help minimize the tax season stress.
Filing Taxes According to Ownership Status
When filing taxes, the process will depend on the rental property ownership status.
● Self-owned rental property. File the IRS Schedule E, Supplemental Income and Loss to state the rent income and expenses
● Sharing ownership/Co-owners. Each individual reports his or her income share and deductions from the rental unit on his or her own tax return. File the IRS Schedule E, Supplemental Income and Loss. Partners can check the owner’s share through the ownership interest included in the property deed.
● Business entity as owner of the rental property. File the IRS Form 8825, Rental Real Estate Income and Expenses of a Partnership or an S Corporation to report the income and deductions. A lot of requirements can be requested based on the type of business entity.
Tax filing can be stressful, but it doesn’t have to be. Having the choice to engage the services of a property management company that can navigate its way around tax return filing provides peace of mind.
You can rely on the qualified experience of a property management team who are experts in filing taxes and keeping your financial records organized. In addition, you can avail of other excellent services such as marketing, tenant screening, rent collection, and property maintenance.
If you want to save your rental income, learning about tax deductions is essential. Hiring a reputable property management company like McKenna & Vane can be beneficial since we can assist a lot, especially during tenant turnovers, property emergencies, and stressful times such as when a tenant fails to pay the rent or refuses to move out.
We superbly handle these trying moments, so give us a call!