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COMMON TAX DEDUCTIONS FOR LANDLORDS

4/5/2017

Being able to take advantage of tax deduction is often what makes owning a rental property worthwhile. These deductions can offset taxable income.

You may only deduct expenses if they are considered ordinary and necessary in the line of business:

An expense is considered ordinary if it is “common and accepted” with your industry. For example, an ordinary expense for a landlord could be paying a contractor to fix a roof leak.
An expense is considered necessary if it is “helpful and appropriate” to your business. For example, a necessary expense for a landlord would be purchasing accounting software to keep track of all the records a landlord must document.

POINTS OF CAUTION

You must keep detailed and accurate records if you are going to claim any of the following as deductions on your taxes.
These are “common” tax deductions. They do not apply to every landlord, rental property owner or property investor.
For example, many of these deductions do not apply to those who rent out homes for condos which are also considered their residence. The property is considered a residence if you have used it for personal use for more than “X” number of days in that year or “X%” of days that the property was rented out at fair market value. (These numbers are listed on Schedule E for the current year.)
You must consult your accountant or the IRS to determine the correct way to file your taxes and the proper deductions for your specific situation.

COMMON TAX DEDUCTIONS

DEPRECIATION:

Depreciation expense is used for those things you have purchased for your business which have a useful life beyond the current tax year. For something to be considered depreciable, it has to meet 3 rules:

Be expected to last for more than a year.
Be valuable to your business in some way.
Lose its value or wear out over time.

Examples of depreciable assest are:

The purchase price of the property (minus the value of the land).
Improvements to the property such as new kitchen cabinets or a new roof.
Shrubbery or fences.
Furniture or appliances
Automobile for business use.

Assets will have different useful lives, such as a refrigerator or a building. There are different types of depreciation, such as straight line depreciation and accelerated depreciation. Consult the IRS or your accountant to determine the type of depreciation to use and the useful life of each asset.

PASSIVE ACTIVITY LOSSES

Owning rental property is considered a passive activity. There are complex rules which apply to passive activities, but in short, they limit your ability to claim losses incurred in passive activity against other types of income.

There are certain exceptions:

If you are considered a real estate professional (certain rules apply such as working at least 750 hours a year on real estate related activities), any rental real estate activities you participate in are not considered passive activities.
If you are considered actively involved in your rental activity, you can deduct up to $25,000 in passive rental losses if you make under $100,000. Actively involved means you must have participated in making management decisions, such as finding tenants or deciding on the terms of your rentals and your interest in the rental activity has never been less than 10% for the year. The amount you can deduct will decrease for every dollar your income is above $100,000. You will not be able to deduct any passive activity loss once your income reaches $150,000.

REPAIRS

You may deduct the expense of repairs. Repairs are considered work that is necessary to keep your property “in good working condition”. They do NOT add significant value to a property. Repairs include things like painting or roof repair. It is important to understand that all maintenance you do on your property is NOT considered repair. The IRS makes a distinction between improvement and repairs.

Improvements are seen as adding value to the property. For example, an entire new roof would probably be considered an improvement. Improvements CANNOT be deducted in full in the year they incurred. They must be capitalized and depreciated over their useful life.

TRAVEL EXPENSES

Landlords are allowed to deduct certain local and long distance travel expenses that are business related. This does not include commuting expenses, meaning traveling from your home to your everyday office or place of business.

If you have your own vehicle for local travel, you can take your deduction using either the standard mileage rate or using the actual expenses incurred, such as the cost of gasoline and maintenance on the vehicle. You can also deduct parking fees and tolls, interest on a car loan and any applicable registration or license fees and taxes. If you do not have a vehicle, you can deduct your public transportation expenses for business purposes.

Many rental property owners live in other states from their rental properties and sometimes travel to visit the property. If you travel to visit your property, don’t forget to keep all receipts and take advantage of these deductions.

INTEREST

You can deduct the interest you have paid on business related expenses. For example: You can deduct the interest you have paid on mortgage payments or other business loans, car loan payment (but only the part used for business purposes) and the interest paid on credit cards used solely for business purposes.

HOME OFFICE

You can take the home office deduction if you use a part of your home exclusively as an office for your business. You must conduct the majority of your business here to claim the deduction. The amount you can deduct depends on the percentage of your home that your home office takes up.

ENTERTAINMENT COSTS

Unfortunately, entertainment costs do not refer to costs used to entertain yourself. Entertainment costs mean those incurred during business dealings. For example, taking a client to your country club or giving a potential investor tickets to the theater are entertainment expenses.

LEGAL AND PROFESSIONAL FEES

This includes the fees you pay to an attorney, accountant, real estate agent or fees paid to other professional advisors.

EMPLOYEE COMPENSATION

You can deduct the wages you pay to someone who does work for you, such as the wages of both full-time employees, such as a live in Property Manager or Maintenance employee and part time employees, such as a contractor you hire once to fix a roof leak.

TAXES

You can deduct your property taxes, real estate taxes and sales tax on business related items that are not considered depreciable for the year. You can deduct fees for tax advice and the preparation of tax forms related to your rental real estate property. However, you cannot deduct legal fees from defending title of the property, to recover property or to develop or improve property. You must add these types of fees to your property’s basis.

INSURANCE

You can deduct the premiums you paid on most types of insurance including health, accident, causality, theft, flood, fire, liability, vehicle and health insurance for your employees.

CASUALTY LOSSES

If your property was damaged by a catastrophic event like a fire, you may be able to deduct some or all of the loss. The amount you can deduct will depend on your insurance and the amount of damage to the property.

OTHER COMMON TAX DEDUCTIONS INCLUDE:

Advertising costs.
Rent you paid to others.
Telephone calls related to your rental property activities. However, you cannot deduct the first line for local service coming into your home. That is considered a personal line.
You can credit or deduct expenses paid to make your property accessible to individuals with disabilities or the elderly.
If your property is considered a commercial building, you can deduct costs to make it energy efficient.

YOU SHOULD ALWAYS CONSULT THE IRS OR A CPA TO DECIDE WHAT DEDUCTIONS ARE APPLICABLE TO YOUR SPECIFIC SITUATION.

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what records should i keep for tax purposes?

4/5/2017

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Because of the complex nature of real estate investor taxes, you should keep complete and detailed records of all important documents, income and expenses throughout the year in order to take advantages of the many available tax deductions. Knowing what records to keep for tax purposes can save you money and stress!

Keeping detailed records can help you for many reasons:

It will make it much easier to file your taxes.
Having everything recorded will prevent you from missing out on deductions and save you money!

Having a spreadsheet you can quickly pull up, will easily tell you how much you paid that contractor on July 17th, instead of guessing “I think I paid him $800 in May?”.

In case you are audited or the IRS has any questions, you will have the proof to back up your claim. Without documentation, you will be spending time and money trying to find the proof. Worse yet, if you cannot come up with a receipt, you may have to pay additional taxes and penalties.

WHAT RECORDS SHOULD I KEEP TRACK OF?

The short answer is EVERYTHING! The IRS is notorious for auditing small businesses, especially those that show a loss in consecutive years.

Also, many IRS Agents do not understand the tax nuances that apply to real estate investors, making them more likely to question your filing. You will need to have proof if the IRS questions any of your items or even in the everyday course of business, if someone tries to question a payment.

You need to keep PERMANENT RECORDS and SHORT-TERM RECORDS.

PERMANENT RECORDS:

All tenant leases.
Any sort of legal documents – fines, inspection reports, court appearances.
Any type of permit you have taken out on the property.
Anything you would depreciate – such as property or improvements.
If your company is an LLC, LP, S Corporation or other, keep all records pertaining to such.
Insurance policies.
Loan documents – such as mortgages.
Past years taxes.
Property title/deed.

SHORT TERM RECORDS:

Not just a couple of months, but you will want to keep any documents you deem important enough to claim on your taxes for a minimum of 5 years.

Keep anything that counts as income or an expense for the given tax year, such as:

Advertising costs for your business or property.
Entertainment expenses – such as dinners or lunches for current or potential customers or business associates.
Interest paid on mortgage and any credit cards for business use.
Legal/professional fees – for accountants, lawyers, insurance agents, Realtors.
Office expenses – Internet, 2nd phone line for business, office supplies, home office deduction if you have a home office used solely for business.
Rent received.
Repairs.
Security Deposits received – When a tenant’s Lease ends, if you keep part of the deposit, you must record it as income. If you keep some of it to pay for repairs, the money you spend on the repair is considered an expense, which you can deduct on your taxes.
Travel expenses for business – such as miles drive for rental activities.
Utilities paid.
Wages paid to employees or independent contractors.

HOW SHOULD I KEEP TRACK OF MY RECORDS?

You should keep a digital copy (computer) and/or a hard copy (paper) of all your records.

DIGITAL COPY:

You will want to use a program such as Quicken or just create a spreadsheet with Excel. You should do this as soon as the income comes in or the expense occurs. Include as much detailed information as possible – the date, time, who you paid or who paid you, what the income or expense was for and the amount. Also include method of payment – cash, check number, credit card, money order, etc.

Some software programs will link directly to your bank accounts and will record your income and expenses for you. However, a simple spreadsheet will do the job. You should set up separate records/spreadsheets for each property, for each type of expense and for separate types of income. The point is to record as much information as you can at the time of the transaction, so you can easily create financial reports in the future. It is MUCH easier to keep records as you go than it is to dig them up for recording, at a later date.

You should always back them up on CD or an external hard drive and even with a paper copy. They should be printed out at the end of every month and/or at the end of the year.

HARD COPY:

You will want to make sure you have a paper copy of your most important documents. If possible, you will want to store them in a fire-retardant filing system or safe deposit box. If you cannot find one large enough for all your files, keep the most important ones, such as titles to the property in this box. Organize everything by year and then alphabetically sort the files so they are easy to find.

Just a bit of organization along the year will save you money and reduce stress at tax time!

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reasons you might want to file an extension for your taxes

4/5/2017

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Tax day is just around the corner and for many investors, panic can set in. Maybe all your tax documents have not arrived yet, maybe someone made a mistake. Maybe you can’t find the receipt for that large improvement or any number of other hold ups.

Don’t worry, just file a tax return extension! The IRS realizes that not everyone has a quick and easy return and if you are a real estate investor, your return is probably not “quick and easy”. If you feel like you are rushing to get everything together and feel the stress of that rush, it might be a good idea to file an extension.

NOTE: Extension are only for additional time to file. All taxes due are still due on the actual due date. The best way to get the tax paid on time is to estimate what you owe. Contact your CPA and ask them to prepare an extension payment calculation for you using the information you have received so far. If you are not sure what your profit or loss will be from your rental properties, use an estimate along with the rest of your tax documents. If your extension payment ends up being more than you owe, then you can have the excess refunded when you file your returns.

HERE ARE A FEW REASONS WHY IT MAY BE IN YOUR BEST INTEREST TO FILE AN EXTENSION:

No Penalties for Filing Extension

Extensions are legally allowed by the IRS, so use them to your benefit! As long as taxes are estimated and paid before the due date, you can extend your returns, penalty-free. Most states also accept the federal extension, so depending on where you need to file, one extension may extend to the state you need. Extending your Partnership or S Corporation gives you until September 15th and extending your personal return gives you until October 15th. Time to get everything together without as much rush and stress!

Less Chance for Mistakes

This is the advantage I like the best. Many times, tax documents arrive late. You may receive documents just days before you need to file your personal returns. You may receive a “corrected form” just days before Tax Day.

If you have a new investment, you may not be sure what documents you are supposed to receive. If you miss a document, the error is fixable, but this will probably be at an additional cost to you.

Then there is increased risk that your CPA or tax preparer will make a mistake in the RUSH of getting the huge volume of tax returns prepared in a short period of time. Most tax preparers are working LONG hours during tax season, so that increases the likelihood of a mistake, as well as added IRS audit risk. So why not extend and make sure you don’t miss anything and give your preparer more time to devote to your taxes?

Time is on Your Side

There is much work required to get your tax documents ready to hand over to your CPA, especially if you are a real estate investor – organizing your receipts, reviewing your books and making sure that everything is accounted for in terms of expenses. Depending on how many activities, properties and investments you have, it can take a significant amount of time. Why not give yourself a little extra time?

Extending your returns will give you additional time to ensure your taxes are done correctly and that ALL of your tax deductions are captured and you receive the maximum refund possible!

Power of the Roth IRA

If you made a Roth IRA conversion in 2016, you have until the date you file your 2016 taxes to confirm or undo you Roth conversion. This give you until October 15th to monitor your investment performance during 2017 and determine whether or not the Roth conversion was beneficial to you. That is quite an advantage!

If your investments didn’t grow as well as you expected, you are able to undo the conversion and put the funds back in a traditional IRA. After your taxes are filed, this perk is gone.

Retirement Planning

Traditional and Roth IRA contributions can only be made until April 15th, but some plans can be extended to September or October. If you plan on making any retirement contributions to accounts like SEP IRAs, 401Ks or SIMPLE IRAs to reduce your taxes, you may have until the date you file your tax returns to make those contributions and still deduct it for the 2016 tax year. This may help you reduce your tax liability and give you additional time to gather funds for the contribution.

Multi-Year Planning

You have more time for planning! If you file your taxes later in the year, then you have a better idea of where you stand for 2017. There may be opportunities to shift items between tax years to get the best tax savings.

Potential strategies include changing accounting methods, making elections to carry-forward or carry-back certain losses or taking advantage of the bonus depreciation or cost segregation for real estate. With a better idea of how the following year will turn out and what new tax laws might be, you can make better informed decisions.

As always, consult with your CPA or tax advisor for professional advice on your particular situation!

Don't find yourself here:

Plan ahead and enjoy life!

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COMMON TAX DEDUCTIONS FOR LANDLORDS

what records should i keep for tax purposes?

reasons you might want to file an extension for your taxes

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