Tax time can be stressful and costly for rental real estate investors who are unprepared. Are you ready for the April 15 deadline to file your taxes? The following tax tips for landlords who own rental real estate will help you make the most of tax time and prepare yourself for the year ahead.
Disclaimer – The following content is for informational purposes only and is not to be thought of as tax advice. If you are seeking tax advice, please make sure to contact a tax professional. If you have questions about Red Door Company’s property management services, please contact us.
Find a Rental Real Estate Tax Preparation Professional
The first step rental property owners should take towards tax preparation is to find a CPA who specializes in, or has a sound understanding of, real estate investing and rental real estate. There are a number of tax deductions landlords can take advantage of on a yearly basis. Working with a CPA who is a real estate investor or who specializes in preparing taxes for real estate investors will ensure that you don’t miss out on valuable deductions.
Don’t have a CPA yet? Now is the time to find one. You can start your search by asking your fellow rental real estate investors for recommendations. Landlords might also want to consult their property management company for advice on CPAs who specialize in working with real estate investors. Whatever you do, find a qualified CPA now!
Get Organized Prior to Meeting with CPA
Tax professionals often charge by the hour, so the last thing you want to do is to show up to your appointment with piles of unorganized papers and receipts. A simple money-saving tax tip for rental real estate owners is to arrive at your appointment as organized and prepared as possible. Round up all your receipts, review all your financial records and take the time to do the math on all your income and expenses for the year.
The task of getting organized and prepared before meeting with your CPA can seem daunting for landlords. This is especially true if you own more than one rental property. Fortunately, Red Door Company helps our landlord clients with this step by providing monthly and end-of-the-year statements (along with bills, invoices and more) and making that information readily available in our secure, online landlord portal.
Understanding Rental Property Depreciation
Rental property depreciation is one of the tax deductions real estate investors receive from the Internal Revenue Service as long as that rental property falls within certain guidelines. According to the IRS, “You recover the cost of income-producing property through yearly tax deductions. You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return. Three factors determine how much depreciation you can deduct each year: (1) your basis in the property, (2) the recovery period for the property, and (3) the depreciation method used.”
Depreciation on income producing property can be tricky and that is why the most important tax tip is for landlords to find a CPA familiar with rental real estate investing. While it’s not necessary for landlords to understand depreciation as thoroughly as a CPA, a basic understanding is useful when it comes to thinking about and preparing for tax time. It is also useful knowledge for property owners because depreciation reduces your basis (your capital investment in a property) for figuring gain or loss on a later sale or exchange.
Investigate Refinancing Your Rental Property
Now would also be a smart time to investigate whether refinancing your rental property is a smart move. One benefit is that when you refinance your rental property, you can deduct all costs associated with obtaining a new mortgage. Those costs are not deducted all at once but are spread out over the life of your loan.
Tax implications aside, should you refinance your rental property? There are many reasons why you may want to refinance. If your rental property is underwater (investigate HARP), or you need to lower your monthly payment, or you want to pull cash out (possibly for other rental investment purchases), refinancing might be the right decision. Speak with your CPA and your lender before refinancing a rental property mortgage.
Reviewing Carrying Costs
Tax season is also a good time for landlords to review carrying costs of their rental properties. As a rental real estate investor, think of your carrying costs as PITI/HOA- Principle, Interest, Taxes, Insurance, and HOA dues. Unlike other expenses (e.g., repairs and vacancies) which are uncertain, you can plan for and budget for your carrying costs with certainty.
If you follow our tax tips for rental real estate investors, you are already taking the time to organize your financial records before meeting with your tax professional. With that information in hand, it is also an excellent time to examine carrying costs and plan to budget for the year ahead – especially if you own multiple rental properties.
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