Tax season is overwhelming for everyone. But, for landlords and real estate investors, it can be even more challenging. Keeping track of your rental property's income and incurred expenses is a year-round task that requires plenty of patience and organizational skills.
Failing to report your income appropriately can result in IRS audits and penalties such as costly fines and fees. That’s why you should take your time reviewing your expenses and income reports.
But, how can you do this when you have to deal with a ton of other responsibilities, such as property maintenance and rent collection? The experts at KRS Holdings have put together this comprehensive guide to help you do your taxes!
Streamlining the Tax Filing Process
Landlords often find tax filing challenging due to its complexity and time commitment. You must track rental income, maintenance costs, operational expenses, depreciation, and mortgage interest.
As if this wasn’t enough, tax laws frequently change, requiring landlords to stay updated on deductions like repairs, travel expenses, and home office use. Managing multiple properties adds to the difficulty, as each unit requires separate record-keeping.
Distinguishing between capital improvements and deductible repairs can be confusing. If you fail to maintain detailed records, you risk missing deductions or facing audits. Luckily, we’ve compiled this list of essential tips for accurate and compliant tax reporting.
Keep Separate Finances
Ever heard the saying: “Don’t mix business with pleasure”? This couldn’t be truer in the world of real estate.
Owning a rental property can be a great way to supplement your income and grow your wealth. However, you should never mix your personal finances with the finances of your rental property.
Keeping separate finances will help you avoid confusion and costly mistakes when doing your taxes. By having a separate bank account and credit card for your rental, it’ll be easier to keep track of your income and expenses.
This will make it easier to identify potential deductions and ensure you have all the information you need for tax season.
Keep Detailed Financial Records
Creating a monthly report with all of the expenses and income generated by your rental property can be boring and time-consuming. But it’ll save you plenty of time and effort during tax season.
By keeping track of all your expenses and income, and organizing everything into categories, you’ll be able to streamline the tax filing process and avoid costly mistakes. Moreover, keeping track of all your expenses can help you identify areas of opportunity to grow your return on investment (ROI)!
Understand Tax Deductions
Tax deductions reduce your taxable income by allowing you to subtract eligible expenses from your rental income. These deductions lower the overall tax liability, helping you maximize your profits while covering the necessary costs of property ownership and management.
Common deductions include:
Mortgage Interests: You can deduct all interest paid on loans for your rental properties.
Property Taxes: State and local property taxes are deductible.
Depreciation: All properties depreciate over time. Luckily, landlords can claim annual depreciation to make up for the cost of dealing with property wear and tear.
Repairs & Maintenance: You can deduct the costs of fixing and maintaining your property, including contractor fees and cleaning and construction supplies.
Insurance Premiums: You can deduct rental property insurance costs.
Utilities: If you pay for the utilities in your rental, you can deduct the total cost from your taxable income.
Property Management Fees: Fees for professional management services are deductible.
Legal & Professional Fees: Attorney, accountant, and consultant fees can also be deducted.
Travel & Mileage: If you’re an out-of-state landlord, you can deduct all costs for property-related travel.
When making deductions, it’s crucial that you have all the proper documentation and comply with the local laws. Otherwise, you won’t be able to claim deductions.
Familiarize Yourself with Local Tax Laws
Landlords must stay informed about tax laws to avoid missed savings, penalties, or audits. Knowing deductible expenses, depreciation rules, and filing requirements can reduce taxes, ensure compliance, and raise rental income management.
Tax laws change regularly. So, make sure to regularly check the IRS guidelines and your state’s official tax websites.
Subscribing to real estate and tax newsletters, joining landlord associations, and attending seminars or webinars on the topic can provide you with valuable updates.
Networking with other landlords or real estate investors can also offer insights into new laws. Staying informed can go a long way in preventing costly mistakes, maximizing deductions, and ensuring a smooth tax filing process.
Partner with a Professional
Many landlords hire a CPA to help them file their taxes and ensure compliance with ever-changing regulations. While CPAs specialize in tax filing, hiring a property manager can be more beneficial for landlords.
Property managers can help you track rental income, maintenance expenses, and deductible costs, ensuring accurate records throughout the year. This will help you streamline the tax filing process and ensure legal compliance.
The right property management company can also help you with other important property management tasks, such as property upkeep, rent collection, tenant screening, and property marketing.
They will also help minimize your tax liabilities by optimizing operational efficiency and reducing costly mistakes.
Bottom Line
Filing your taxes can be a challenging and overly complicated process. Unfortunately, it’s an unavoidable part of being a landlord. Failing to file your taxes on time or making mistakes can lead to audits and costly fines.
However, by keeping track of your finances, understanding tax deductions, and staying up-to-date with tax law changes, you can streamline the tax filing process. If you need any assistance filing taxes for your Richmond rental, contact KRS Holdings today!