Rental properties offer more tax benefits and more substantial tax deductions than almost any other investment. The thing is, it’s easy to commit mistakes in property tax management, which is why many landlords end up paying higher taxes and fail to take advantage of the deductibles available to rental investment property owners.
From recordkeeping and property tax comparisons by state to property tax appeal work, here are some valuable tips on how you can avoid making tax mistakes to get the most out tax season.
1. Keep Records Organized and Up-to-date
The importance of keeping an updated and organized record of your rental income and expenses cannot be understated. Many property owners wait until right before tax time to organize and compile records that are necessary for completing their tax returns. And this is often the reason why they miss the filing deadline or fail to benefit from qualified deductions.
Rent payment records, receipts from rental-property-related expenses, lease documents, land tax assessments, and bank statements are just some of the vital paperwork that you need to track and maintain. You can find a tax estimator as well as plenty of other free tools and resources online. Keeping an eye on your business transactions throughout the year will make it easier for you to identify and take advantage of credits and deductibles for qualified business expenses.
2. Get Deductible Costs Right
The IRS has quite a long list of tax-deductible expenses that can help save rental property owners thousands of dollars. Some of the most common expenses you’ll want to track include:
- Advertising and marketing expenses
- Legal and accounting fees
- Property management fees
- HOA fees
- Loan and mortgage interests
- Taxes
- Insurance
- Repair and maintenance expenses
- Business-related travel expenses
- Home office expenses
Keep in mind, though, that not all of your expenses can be claimed as immediate deductions. Initial repair and property improvement expenses, for instance, cannot be claimed in the same year that they were incurred. Advertising costs, loan interests, land tax, property agent fees, and maintenance expenses, hidden costs, among others, are usually considered as immediate deductibles, but some may be subject to conditions. Moreover, you can also capitalize on depreciation deductions, which allows landlords to get back a portion of the cost of the rental property over several years.
Suffice it to say; deductibles can be fairly complex. You need to study and get your deductible costs right if you want to maximize your entitlements. Better yet, seek the help of property and tax professionals.
3. Be Wise with Debt Payments
Not all debts are created equal. So, while the idea of simultaneously paying all of your debts is very tempting, it may not be the wisest move. You see, certain types of debt are tax-deductible and can help you save some money on tax season.
The best thing to do, then, is to take care of non-tax deductible debts – like car loans and other personal loans – first. Once all your non-tax deductible debts are paid, that’s the time you move on to the tax-deductible ones, which includes your investment property loans. This way, you can eliminate the debts that don’t benefit you during tax time earlier and maximize those that do.
4. Understand the Implications of Capital Gains
Should you decide to sell your rental property in the future, you will either make a capital gain or a capital loss, which is the difference between what you spent on buying and developing the property, and how much you sold it for. If you make a capital gain, this will have to be included in your tax return for the current financial year, and you’ll have to pay capital gains tax for it.
The capital gains tax could potentially take up a massive chunk of your tax budget, which is why you need to exercise due diligence before deciding to sell a property.
5. Don’t Miss Property Tax Assessment Deadlines
Property tax is a significant expense for rental property owners, and that’s why it’s imperative to give your annual tax assessment a good review. If you think your tax assessment seems off, you can file an appeal, preferably with the help of an attorney.
Property tax appeal deadlines are often short and exacting. Depending on your location, they can range anywhere from 15 to 45 days. If you miss the deadline, you’ll need to wait for the next cycle, which could be in another one to four years. Until then, you have to pay higher property taxes. That said, working with an experienced property tax lawyer can expedite the whole process and avoid the risk of not being able to file on time.
