Tax Season Tips for Landlords
The tax season can be very intimidating for many people in business, especially landlords. Federal tax regulations are quite strict when it comes to rental property ownership and a minor error could end up costing your rental property investment dearly. For this reason, it’s very important that you understand how to navigate filing your property taxes.
According to the Internal Revenue Service (IRS), rental income is any payment that a person receives for the occupation or use of their property. From this definition, all the income you receive that is attributed to your property is taxable. This includes normal rental payments, rental advances, security deposits, expenses paid for by the tenants, payment for lease cancellation as well as any goods or services you receive in lieu of rental payments.
To avoid incurring significant costs in tax payments, you need to learn ways in which you can efficiently file your property taxes. In this article, we’ll discuss some of the tools and techniques you can use to legally reduce your tax obligations in the financial year.
Tax Deduction Tools for Rental Properties
There are a number of tax deductions that are available to landlords to help you ease the burden in the tax season. Some of them are as follows:
Federal regulations allow landlords to deduct many types of insurance associated with rental property ownership. Among these are landlord liability insurance and flood insurance. For such coverage, you can deduct some of the premiums paid as part of the costs related to managing the property.
The Costs of Property Depreciation
Rental properties, like other forms of property, undergo depreciation over time. This means that your rental property loses value through both physical and functional depreciation. As such, the federal tax laws allow you to deduct some of these costs from your property over a period of time.
The Costs of Repair and Maintenance
Repair and maintenance costs can always be deducted from your property taxes, regardless of whether the damage was caused by the tenant or if it was a result of neglect by the landlord. These repair costs need to be from ordinary, day-to-day damages and the cost should be reasonable. A few examples of such damages include:
- The cost of fixing a broken window
- The cost of replacing electrical appliances
- The cost of plumbing and maintenance of drainage pipes
- The costs of repair and maintenance are tax-deductible because they are necessary for the everyday operation of the rental property.
Resources for COVID-19 Relief
During this challenging period, the government has implemented some relief measures that are meant to ease the financial burden caused by the COVID pandemic.
There have been many changes in the operation of the real estate industry since the start of the pandemic. For instance, real estate companies have shifted to using virtual tools for the collection of rental payments and conducting property showings. However, landlords have still received some of the lowest rental collections in recent history.
To help landlords recover some of their income, the government has provided a COVID relief package to assist the tenants with rental payments. In the year 2021, this package amounted to a total of $25 billion to be accessed by landlords on their tenants’ behalf. There are also various resources available when you need to file your property taxes.
The Records Needed for Property Taxation
There are a number of records that a landlord needs to have during the tax season. These documents will help you to keep track of your property’s expenses as well as file for the tax returns mentioned. Some of the records you will need during tax season include:
- Any relating to your business entity
- Copies of lease agreements or any rental contracts
- Any documents pertaining to your real estate investment, for example, property titles and deeds
- Previous tax records from subsequent years
- Any permits you may have acquired in relation to the property
- Any records of loans or mortgages on the property
- Documents relating to your property’s insurance coverage
There are also other documents you may need which are required for that particular tax year. These include:
- Receipts for rental payments
- Receipts for repairs and maintenance
- Receipts for utility costs such as water supply
- Interests on your mortgage
- Any documents relating to the cost of listing or advertising your property
- Any documents pertaining to legal fees in relation to the property
- Any credit cards in relation to your rental property
Having these documents organized and stored safely can help you successfully minimize your tax obligations. They also make the process of filing your tax returns much simpler.
Tips on Filing Your Taxes Based on Ownership Status
There are different ways of filing your taxes depending on the status of your ownership including:
Individual Ownership of a Rental Property
If you are a landlord who owns a rental property by yourself, you can file the IRS Schedule E – Supplemental Income and Loss. This is basically for reporting the income and expenses from your rental property.
For a co-owned rental property, the co-owners should report their share of the income and expenses using the IRS Schedule E. If the property is shared on the basis of a partnership, the share should be according to the ownership interest.
Ownership of a Rental Property Through a Business Entity
If your property is registered under a business entity, then you should report your income and expenses using the IRS Form 8825 – Rental Real Estate Income and Expenses of a Partnership or an S Corporation. There may be additional filing requirements depending on the classification of the business entity.
All you need when filing your tax returns is the right information and guidance. You may also want to consider hiring a property management company to help you and provide you with detailed financial reports.
At Alltrade Property Management, we have years of experience handling every aspect of property management for our clients. Get in touch with us today for end-to-end services that will provide you with the best returns on your investment!