The Internal Revenue Service (IRS) requires landlords to declare all rental income received when filing taxes. But as you probably know, filing taxes can be a stressful and intimidating process, especially for new and experienced landlords alike.
Tax season has been made even more stressful due to eviction moratoriums coming to an end, the price of rent increasing exponentially and any other financial concerns property owners may have as a result of the pandemic. That’s why, in today’s article, we’ll walk you through everything you need to know about what the tax season entails for landlords.
What Rental Income Should You Declare?
The IRS defines rental income as any payment a landlord receives in exchange to occupy a rental property. Such rental income includes rent payments (both normal and advance), resident-paid expenses, late rent fees, and lease cancellation fees. Security deposits may also count as rental income.
Can You Make any Deductions from Taxes on Rental Income?
Yes! You may be able to shrink your tax obligations by deducting certain costs. The IRS determines what a landlord can deduct by using the standard of “ordinary and necessary expenses.” The following are common tax deductions available to landlords to help increase tax savings:
- You can deduct the costs of legal and professional fees as long as the services are related to your rental property. Suppose, for instance, that you have to engage an accountant to file your rental property taxes, or have to hire a lawyer to draft a lease agreement. In such cases, the rental-related expenses are tax-deductible.
- You can deduct the costs of traveling expenses related to rental activities. For example, if you have to use your personal vehicle to pick up rent checks, buy supplies, or show the property to prospective residents.
- You can deduct the costs of repairing the unit. Good examples of such repairs include when you have to change the locks on doors, fix a broken window, or repaint the walls.
- You can deduct insurance premiums paid for your rental property. From landlord liability insurance to flood insurance, you may be able to deduct some of these costs of insuring your property.
Note, however, that what you can’t deduct is any money you spend to renovate, improve, or remodel your property. For instance, if you choose to convert a 2BR property into a 3-BR property, you can’t deduct those kinds of discretionary costs.
Are There some Helpful Resources for Landlords in the Wake of Covid-19?
Yes! The past two years have proved to be extremely difficult for landlords and residents alike. In some instances, landlords even had to shift some practices in the age of social distancing. For instance, in-person property tours were replaced with video tours. But even while some practices resume pre-covid standards, others remain unpredictable. Examples of such practices include turnover rates, rental prices, and resident evictions.
According to a report compiled by the Harvard Center for Housing Studies, landlords only got half the expected rent during the pandemic era. And it was largely for this reason that the government initiated the relief packages for landlords. But while these payments have stopped, the government still has some helpful resources for landlords, benefits.gov, for example, contains lists of helpful resources for landlords that can help mitigate the ravages of the pandemic.
What Records do Landlords Need During the Tax Season?
Keeping accurate records is key to a successful tax filing. Errors, on the other hand, can prove to be costly to your bottom line. When you have organized records, you’ll be able to easily find receipts and track deductible expenses. All of this will make filing during tax season a more smooth experience for you. The following are some important documents you’ll need to keep properly organized for a seamless process:
- Lease or rental agreements
- Previous tax records
- Loan documents
- Property titles, or any other real estate investment papers
- Insurance policies
- Legal documents, including any inspection reports, or court appearances required for the property
In addition to that, you may also want to consider short-term records related to income or expenses from a given tax year. Such documents include:
- Rent payment receipts
- Mortgage interest
- Repair receipts
- Utility costs receipts
- Cost of listing the property
- Professional or legal fees for lawyers, accountants, property managers, etc.
Sure, there is a lot to keep track of. However, the effort will be worthwhile. Keeping these documents orderly can help reduce stress and keep your tax filing process streamlined.
How Must Landlords File their Taxes Per the IRS Guidelines?
You’ll need to use Form 1040 and then attach Schedule E in order to file your rental income. On Schedule E, you’ll need to list all your rental income, as well as expenses and depreciation for every rental property you own. Examples of common expenses include repairs, insurance, auto and travel, and advertising.
The Schedule E form allows you to report on a maximum of three rental properties. Beyond that, you’ll need an additional Schedule E to help you list any other properties you own on Lines 1 and 2. Note that the filing process can also differ depending on your landlord’s status. For instance co-owner a property has a slightly different filing process and sole ownership filings.
There you have it, everything you need to know about filing during this tax season. However, staying on top of your taxes isn’t always easy. That’s why savvy professionals opt for professional help.
If you’re looking for professional help in filing taxes for your Pocatello rental property, Five Star Property Management can help! At Five Star Property Management, we offer full-service property management solutions and our managers specialize in managing single-family properties, condos, townhomes, apartments, and HOAs. Get in touch to learn more!