It’s tax season! And as a landlord, you have an obligation under federal law to report all your rental income when filing tax returns. The Internal Revenue Service defines a rental income as any payment received in exchange for occupation of a property.
The rental income isn’t only limited to the monthly rental payments. It also includes security deposits, fees for lease cancelation or termination, and tenant-paid expenses.
Filing taxes can be anything but easy, especially if you are a newbie landlord. And even for seasoned landlords, filing taxes can be intimidating, as well. That’s because a tiny mistake can have devastating effects to your rental business.
As a landlord, it’s important that you take advantage of tax deductions as much as you can. More so, now that eviction moratoriums are coming to an end, rents are skyrocketing, and a myriad of financial uncertainties linger after the pandemic.
In this article, we’re offering helpful tips to make tax filing a walk in the park.
Tip #1: Take advantage of COVID-19 resources.
The past two years have been tumultuous to say the least. Covid-19 brought about certain changes in the industry, from moratorium regulations to virtual property showings.
Now that things are returning back to “normalcy,” many practices are also gradually creeping back to normal. However, certain things still aren’t as predictable, including rental prices and evictions.
As a matter of fact, a study by the Harvard Center for Housing Studies found that landlords only received half of the expected rent during the pandemic era.
During the last Covid-19 relief package, the government offered landlords a whopping $25 billion. This came as a response to concerns about the economic effects of the Covid-19 pandemic on landlords and renters. The funds were meant to help renters who had fallen behind on their rent in the pandemic.
While the relief package is no longer available, there are still other resources available to help you with your tax filing.
You can find helpful resources at Benefits.gov. The page has helpful resources including forms, editorials, webinars, and news sources regarding the hurdles landlords faced in the pandemic era.
Tip #2: You may be able to take advantage of some tax deductions.
Knowing how to keep your tax bill as minimum as possible is key. After all, taxes are expenses! Keeping your expenses low will ensure you maximize your profits.
Luckily, as a landlord, you may be able to take advantage of a variety of tax deductions. The following are some of the top tax deductions you can take advantage of as a small residential property owner.
- Interest. This is arguably one of the single biggest deductible expense you’ll have. Examples of tax deductible interests include mortgage interest payments and interest on loans acquired to make rental improvements.
- Travel. Do you rack up any travel expenses for a rental activity? If you have to travel to your rental premises to, for instance, respond to a maintenance request, then you may be eligible for a tax deduction.
- Personal Property. Do you provide tenants with personal property, such as furniture or appliances? If you do, you may get a tax deduction.
- Repairs. When renting out a property, repairs will be unavoidable. Luckily for you, these are fully deductible in the year in which you incur them. Some examples of repairs that may be tax deductible include replacement of broken windows, fixing leaks, and fixing floors or gutters.
These are just a few of the deductions that the IRS allows landlords to claim on their rental properties.
Tip #3: Keep accurate records.
Having good organization skills is a must-have for any serious landlord. This is especially true if you want to take advantage of the aforementioned tax deductions. It is also helpful to keep accurate records when tracking all rental property expenses.
When you have records that are properly organized, going through the tax season can be a breeze. You’ll be able to easily retrieve receipts, keep track of deductible expenses, and prepare your tax returns.
At the very least, you’ll want to keep these records properly organized:
- Lease agreements.
- Legal documents, including important notices, inspection reports, fines, and even court appearances.
- Any permits or records pertaining to your property.
- Mortgage or loan documents.
- Previous tax records.
- Property’s ownership documents, including deeds.
You’ll also want to consider short-term records that are related to previous years’ incomes or expenses. These can include:
- Costs of advertising and leasing the property.
- Costs of evicting a tenant that may include legal fees.
- Receipts for maintenance and repairs done to the property.
- Receipts for rental payments.
- Receipts for utility expenses.
Although you may have a lot to keep track of, your efforts can turn out to be worthwhile during the tax season. They will help minimize stress and ensure your tax filing process is streamlined.
How to File Taxes as a Landlord
How you file your taxes depends on the manner in which you own the property. That is, if you own your property individually or if you own it through a business entity.
If you own your property individually, you’ll need to file IRS Schedule E, Supplemental Income and Loss. On this form, you’ll need to report all your rental income as well as expenses.
If you own it through an entity, then you’ll need to report your income and expenses as a business entity. You’ll need to file the IRS Form 8825.
Filing taxes can be anything but simple. But luckily for you, it doesn’t have to feel like a headache. With these tips, filing your taxes should be a smooth process. Ideally, however, you may want to involve a professional to help you throughout the process.
Pinnacle Property Management is an experienced property management company serving Torrance and the surrounding areas. We have been in the business for over 30 years now and can help with your financial reporting, among other things. We’ll help you file your taxes quickly and accurately to maximize your refund.
Get in touch to learn more!