As a landlord, you’ll need to take a proactive approach in order to maximize any available opportunity to reduce your tax bill. But tax can be intimidating, especially for first-timers but even seasoned landlords can find the process daunting due to the last two tumultuous years the world underwent.
Luckily for you, we at Florida Property Management & Sales have put together this guide to help you with everything you need to know this tax season.
File Your Tax Returns on Time
Don’t make the mistake of waiting until the last minute. According to the Internal Revenue Service (IRS) estimates, about a quarter of U.S taxpayers waits until the last few weeks to file their returns.
Filing taxes when you are in a rush can lead to costly mistakes and possible breaches of landlord-tenant law. Common mistakes include missing signatures or dates, an incorrect social security number, and math errors. You can avoid all these by preparing your tax returns as soon as you have all the relevant information and documents.
Understand What Deductions are Available
As a landlord, you’re able to deduct a variety of expenses and gain benefits that can significantly reduce your tax bill. The following are some examples of expenses the IRS allows rental property owners to write off:
- Travel expenses: Any money you spend to travel to maintain your property or collect rent is tax-deductible.
- Repairs and improvements: A repair is anything that you do to your rental property to keep it in good condition.
- Rental property depreciation: This is another key tax deduction the IRS allows landlords to make.
- Mortgage interest deduction: You can deduct mortgage interest as a business expense.
In addition to these, other common expenses you can deduct include the following:
- Utilities
- Professional services (such as attorneys, property managers, tax preparers, and accountants)
- Lawn care
- Insurance premiums
- Home office expenses
- Employees and independent contractors
- Advertising
You should also include amortization and depreciation in your tax deductions. Amortization tracks the intangible costs of purchasing a property. A good example is the cost of obtaining a mortgage.
Depreciation is similar to amortization. It’s an annual deduction that tracks the loss in value that a property undergoes over time.
Keep Proper Records
Accurate records are a must-have during the tax season. This is especially important if you’re looking to take advantage of any tax deductions.
By keeping organized records, you can easily find receipts and track deductible expenses. This can help ease the stress that the tax season brings. Below are some records you’ll want to keep organized:
- Rental leases
- Legal documents
- Property permits you may have taken out
- Loan documents
- Insurance policies
- Prior tax records
Also, don’t forget to consolidate short-term records as well. Short-term records include documents related to things like:
- Rental advertising
- Repairs
- Rent payments
- Mortgage interest
- Utility costs
- Professional fees
Ideally, you should maintain both digital and hard-copy records of all your records.
Know What to Declare
The rental income to declare depends on your method of accounting. Two methods exist cash basis method and the accrual method.
The cash basis method is the more popular of the two. With the cash basis method, you’ll need to report income as you receive it and expenses as you pay them out.
The IRS defines rental income as any payment you receive in exchange for allowing the occupation of the property. Rental income may include the following.
- Normal and advance rent payments
- Security deposits
- Lease cancellation fees
- Services received in exchange for a rent payment
- Tenant-paid expenses
Take Advantage of COVID Resources
The age of social distancing brought some changes to certain landlord practices. From virtual property tours to moratorium regulations, landlords have had a lot to keep up with. Even with the world returning back to the pre-pandemic era, some things are yet to normalize.
But things are looking up, as there are a handful of resources that can help you navigate the hurdles of the pandemic. One helpful resource is Benefits.gov. The page includes helpful information in regard to editorials, webinars, and relevant news sources.
Hire a Professional
Hiring a professional is a surefire way of ensuring the tax season goes as smoothly as possible for you. Rental property tax laws are not always straightforward; they can be complicated and are constantly evolving.
Hiring a professional like a CPA or an experienced property management company may be well worth the cost.
Bottom Line
There you have it. 6 proven tips on how to go about the tax season. For expert help, Florida Property Management & Sales can help. We’re a trusted property management company in Broward County, having served hundreds of property owners since 1979!