4 Notable Tax Tips That Landlords Have to Know About
Owning a residential property and renting it out can be profitable. However, landlords have to follow many tax laws to keep their profit levels high. If income and expenses are not reported correctly, landlords can end up paying more in taxes than they actually owe. Considering how important this is, we thought it would be useful to put together an article discussing handy tips to keep in mind to help you with taxes. If this is something that you're interested in, read on for four notable tax tips that landlords need to know about.
Claim Your Home Office
As a landlord, you may not think of your monthly income as being a business in and of itself, but it is. If you want to deduct some of your house expenses, you need to keep and maintain records. You will probably keep those records at home.
If your home office is its own room, or if it's a large part of another room, you can use the square footage to figure out how much you're spending on it. Divide your home office's square footage by the total square footage of your house to determine the percentage of your home that the office represents. Then, multiply the percentage by the portion of your house expenses that relate to your office space.
Improve Your Property
When you own a rental property, you need to keep it in good working order. Keeping it in good condition includes making repairs and performing improvements. A repair is anything that brings the property back to the state it was in when you first bought it.
For example, if you paint the walls, fix a broken window, or change the locks on the doors, you’re simply bringing it back to the way it was when you first bought it. An improvement, on the other hand, increases the value of your property over what it originally had been or makes it last longer than before. For example, if you build a room in the basement and add a new solar electric array to the roof, you’ve significantly improved your home’s value and longevity.
Track Your Mileage
If you have to use your personal vehicle to make business-related trips—for example, when you have to buy supplies, pick up rent checks, or when you show the property to potential renters—you can deduct a proportion of the cost of operating the vehicle against your rental income.
You have two options to calculate your deduction. The first involves keeping a record of the business mileage. You apply this percentage to the total vehicle expenses for the year including gas, insurance, repairs, and loan interest. An alternate method simplifies the process by using a per-mile estimation that changes once or twice a year and can be found on the IRS website.
Be Wary of Recapture
The tax code allows you to expense the purchase of your rental property building over a number of years, though not the land. This can provide you with a sizable annual expense to offset the taxable income for your rental property. However, if you sell the property for more than the depreciated value, you may have to add some or all of the depreciation back into your taxable income. This is called "recaptured depreciation," or "recapture" for short. It can be an unpleasant and expensive surprise if many years of depreciation expense reduction were included in the price of your property. If the area does not maintain its property value, this strategy may be optimal for you.
Conclusion
We hope these tips prove to be useful when it comes to helping you manage your taxes. As you can see, there is a slew of different ways that you can approach this as a landlord. Be sure to keep all of these tips in mind so that you can maximize your profits on your property.
If you need more help with your taxes, then you’ve come to the right place. Tottax helps optimize taxes for all kinds of professionals. Connect with us for personalized bookkeeping services in Denver.
