Whether you're a new landlord or have had a rental property for a few years now, there are tax mistakes that many landlords make that you should know about and avoid. Below are six common mistakes landlords make.
1. Not Planning for Taxes
A lot of investors don’t have a tax strategy or understanding of the tax-saving options available. Some landlords see taxes as the job of their accountant and aren't interested in improving their personal knowledge.
It’s best to work with your accounting firm so you can build up your understanding of taxes and business management. When you know more about taxes and finances, you may find ways to save money. You should look into ways to increase your own understanding of potential deductions and financial planning.
2. Not Keeping Good Records
When you have a rental property and tenants, it’s essential you have good records. You want to keep your receipts and an accurate record of things you purchase for the property. A good way to keep your records is through Xero, an online accounting system. It lets you track payments and expenses from any type of device at anytime. It also often syncs with an accountant’s software, making it easier for you and them.
3. Mixing Your Personal and Business Bank Accounts
When landlords have rental property, they often mix their personal and business accounts so that they don’t know where one ends and the other begins. It’s important to have an account just for your rental property so you know where the money is going and where it’s coming from.
4. Assuming You Won’t Need to File a Return
If you've had losses, you may think you don’t need to file a return, but this is a dangerous presumption. First of all, depending on your documents, you may find you aren’t in the red at all. You might also realize there was a loss, yet you still need to file a return. If you aren’t sure, it’s best to speak with your accountant.
5. Not Paying Attention to Changes in the Tax Laws
There are always changes to the tax laws and it’s really hard to stay up to date. You may think that this year is the same as last year, but chances are that it isn’t true. To be certain, it’s best to speak with your accountant and have him or her look over your information to see what has changed. You may have more deductions than you did last year, or you may have less. But until it’s looked at thoroughly for the current tax laws, you won’t know either way.
6. Confusing Taxable Income and Cash Flow
A lot of businesses make this mistake, but landlords make it a lot more than other businesses. Simply because you have a full bank account doesn’t mean that it’s representative of what you're going to pay tax on. It also doesn’t mean that if your bank account is empty that you don’t owe taxes. It’s best to speak with your accountant to know what to expect.
Knowing the common mistakes that landlords make will help you avoid them. This is true for any landlord, but especially for those who are just getting started. If you have questions about your rental property and taxes, make sure you ask your accountant so that you can reduce your chances of an audit.
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