With the New Year comes the challenging task of getting all of your documents together for your annual tax filing.
As you prepare to file your return, you will need to collect all your receipts, interest payments, insurance premium payments, and a lot of other financial information.
The more information you have on hand, the less you will owe at the end of the year.
Real estate has some of the best tax protections in place to help keep investments profitable in the long run.
Not much has changed for 2016, so if you own a single, mixed-use rental property or a high-rise apartment building, there are still plenty of tax deductions available to lower your amount due.
Start With the Interest
The biggest deduction for many landlords is the interest paid during the year.
If you have a mortgage loan on any of your investment properties, any interest you paid on the loan is tax deductible.
Another possible source of interest deduction comes from your credit cards.
If you used your credit cards for business expenses, the interest might be tax deductible.
Be sure to ask your accountant before you finalize your return.
Total Up Your Insurance Premiums
Insurance premiums are another significant line item when filing your taxes.
Anything you paid to insure your properties can come off your end-of-year income.
If you have an umbrella policy or pay for renter's insurance for your tenants, that might add onto your deduction.
Depreciation Comes Off the Top
When you buy a property, you can't deduct the total value in a single year.
Instead, you depreciate the new asset over the course of several years.
This gives you a smaller, but still significant, tax deduction to take each year as the total value of the asset depreciates to zero.
Itemize Your Repairs and Depreciate Improvements
Any routine repairs you make on your rental property are tax deductible, but improvements are not considered normal repairs.
For example, if you repair the roof on a rental property, that would be considered tax deductible, but if you replace it, the investment is an improvement.
You can still take a tax deduction for improvements, but you have to depreciate them over the expected lifetime value.
That means major repairs often fall under the heading of improvements and might leave you with a more hefty tax bill in the year you schedule them.
Deduct Maintenance Costs
Repairs and maintenance are not quite the same.
If you hire a landscaping company to cut the lawns, that is a deductible maintenance expense.
You aren't fixing anything, but it is a reasonable and repeated expense.
Keep Your Travel Records
Did you know that you can deduct your mileage if you travel to collect rent or make property repairs?
The IRS has guidelines in place so you can either use the actual expenses or the standard mileage rate.
In either case, it can net you a tidy deduction at the end of the year if you track your travel.
Deduct the Taxes You Already Paid
Any property taxes or employment taxes you paid during the year are deductible on your return.
You might have also paid for licenses or permits.
These fees can also be deducted at year end.
Don't Forget the Utilities
Any cost for utilities you pay on your rental properties is deductible.
That means if you pay for heat and hot water, you can deduct the cost from your rental income.
If you include all utilities in the rental agreement, all the payments you make come off at the end of the year.
Professional Fees are Pre-Tax
Anything you pay to your accountant, real estate management company, payment portal, or other professional service company is considered a business expense. You can then use that amount to help offset your rental income for each property.
Itemize Advertising Expenses
If you put an ad in the paper to fill a vacancy, the cost is a normal expense. If you print fliers or buy signs, those are also deductible. Any money you spend on advertising and marketing can be itemized when you file your Schedule E form at the end of the year.
How to Get Organized for End-of-Year Financials
Every rental property you own has profits and expenses.
You will need to track costs on a per-property basis.
When you go to file your tax return, you need to be able to show which repairs were performed on which property.
Breaking down income and expenses based on the individual property allows you to take advantage of properties that show losses, up to the $25,000 annual limit.
For example, if you have a property that has depreciation and repairs totaling $45,000, and you only collected $10,000 in rent, you have a net loss of $35,000.
You can claim $25,000 of that in the year it occurred and carry the remaining loss forward to offset future income.
This helps limit your tax liability if you earn income from sources other than your rental property.
If rental property is your only source of revenue, you can carry the loss forward and use it to offset capital gains taxes when you sell.
The more expenses you have to itemize at the end of the year, the lower your tax liability.
Be sure to keep all of your receipts and invoices to get the best results.
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