The post 10 Rental Property Tax Deductions appeared first on Avail.
]]>
As a landlord, you may not be aware of all the tax deductions available for your rental property. There are certain items you’re probably already spending money on, and by simply claiming these deductible expenses for your rental property, you’ll keep more money in your pocket when your taxes are done.
In this article, we’ll walk through 10 simple rental property tax deductions to make when you’re filing taxes.
What Are Tax Deductions for a Rental Property?
A tax deduction is an item you can subtract from your taxable income, helping lower the amount of taxes you owe.
You only have to pay taxes on the net income earned from your rental business — or in other words, the rental income minus all the related expenses. This is also referred to as your taxable income.
For example, if you earned $12,000 in collected rent, but paid $8,000 in expenses on that property, you would only pay tax on the $4,000 difference, known as your “taxable income.”
What Impact Can Rental Property Tax Deductions Have?
Properly deducted expenses can make the difference between being profitable and having a loss on your rental business. For an average landlord who is in a marginal tax bracket of 25%, each deduction can result in savings of 25 cents per dollar.
Here’s how that works: The amount saved by each deduction is dependent on your current income tax bracket. So, a deduction of $3,000 reduces your taxable income by $3,000 (not your income). Your true savings is really the amount of tax that is not paid since you were able to take the deduction.
To figure this out, take the amount of the deduction (in this case, $3,000), and multiply it against your income tax bracket. For a landlord with a marginal tax rate of 25%, a $3,000 deduction would result in $750 of savings.
10 Rental Property Tax Deductions for Landlords
These are 10 simple deductible expenses for a rental property that every landlord should be aware of and consider as they file taxes.
1. Mortgage Interest
Your biggest expenses are likely your monthly payments for the property you own, so mortgage interest deductions may be one of the larger deductions for homeowners.
According to Rocket Mortgage, “This itemized deduction allows homeowners to count interest they pay on a loan related to building, purchasing or improving their primary home against their taxable income, lowering the amount of taxes they owe.”
2. Home Equity Loan Interest
This includes interest on the home loans and also for lines of credit or credit cards related to investing in your properties. Keep in mind you can only claim a deduction for payments made for interest, not all interest accrued.
You also should be careful to separate credit cards and not commingle personal and business expenses. Otherwise, you’ll have to go through your credit card and remove all personal expenses.
3. Insurance
Your homeowner insurance expenses may be covered in your mortgage, but any business insurance you have is also an expense to remember.
This could include fire, flood, theft, general liability, and other policies you have to protect your properties or business.
4. Utilities
Make sure you are tracking expenses for all utility payments. These are tax-deductible and truly add up. One helpful way to track expenses is to set up a business checking and business credit card completely separate from your personal accounts.
You may have tenants paying you to cover the utility bills, but you would still claim the utility expenses as a tax deduction because the money you are being paid for utilities is going to count as income.
5. Homeowner Association or Condo Dues
Be aware of any other fees you are incurring for your properties. If you’re paying an annual fee for a homeowner association, this is another cost you can deduct.
6. Salaries and Management
If you have a team of contractors, property managers, assistants, or anything else, make sure you are capturing the expenses related to your people.
7. Repairs and Maintenance
One of your larger expense items will inevitably be repair and maintenance. This includes routine monthly maintenance like lawn care or cleaning, and also larger repairs due to property damage.
You’ll have expenses for the direct costs and also any contractor working on the repairs. You should also keep track of interest payments if you take out a loan or credit for repairs.
8. Advertising and Marketing
Not all expenses are related to your property. As a business owner, you are also spending money on marketing, advertising, local community involvement. All of these are business expenses and should be deducted.
9. Attorney or Accounting Fees
While we’re talking about taxes, keep in mind if you owed taxes from last year, this expense is now tax-deductible. If you paid an accountant to file for you, expense the fees for their work.
The same applies to any professional service either from a lawyer, accountant, etc.
10. Office Supplies
Anything you buy for your rental property business operations, like notebooks, a printer, or some tools you’ve been needing, can be counted towards rental property tax deductions.
It’s best practice to keep these supplies in separate transactions and pay for them with a business credit card.
Landlord Software and Online Tools Are Deductible
Don’t forget that landlord software and online property management tools are tax-deductible, too. If you’re paying for landlord software or using premium landlord features like Avail Unlimited Plus, be sure you’re deducting the cost each year.
Use Online Landlord Tools to Simplify Tax Season
To help simplify tax season, it’s important to keep track of all income and expenses related to your rental properties throughout the year. Tools like the Avail Rental Property Accounting feature make it easy to log and track all of your rental property expenses, no matter how many properties you have to keep track of, for free.
Create a free account or log in to get started.
This article is intended for educational purposes only. For tax advice, always consult a tax professional.
The post 10 Rental Property Tax Deductions appeared first on Avail.
]]>The post How to List a Rental Property and Save on Taxes appeared first on Avail.
]]>
At Avail, we take the entire process of rental property ownership seriously. A big part of that is managing finances.
We want you to have a great experience with your tenants and to streamline the entire process. But most of all, we want your rental properties to be great investments for you.
So we’ve invited our friends at the Real Estate CPA to provide some insight about the tax implications of when you place your rental property in service.
Enter the Real Estate CPA. The following is a guest post from The Real Estate CPA.
When you purchase a property that requires rehab work, the date you place your property in service can have a big impact on the amount of tax you owe at the end of the year.
Follow these steps to list at the best possible time and make the best financial decision for your investment.
Does the Date I Place My Rental Property In Service Matter?
The date you place your property in service can mean the difference between immediately deducting rehab costs, and having to capitalize and depreciate them. And in the world of tax, immediately deducting rehab costs can save you thousands of dollars.
So what does placed in service mean? When should you place a property in service? And what are the tax benefits?
Placed In Service
A property is considered placed in service when it is “ready and available for rent.”
Now, the ready part is a bit of a gray area, but it’s generally when the property is habitable and no longer dangerous. That means flooring is down, sheetrock is on the walls, and someone could safely live there. It is also important to note that if there are state and local laws regarding what makes a property ready, then the IRS will defer to their definition of ready.
Available means the property is advertised for rent. This can be a simple “For Rent” sign in the front yard or an ad on Zillow. And when you purchase a property with a tenant in place, it is in service from day 1.
Rehab Expenses Before and After You Place a Property in Service
Before you place a property in service, all rehab expenses are capitalized and depreciated over 27.5 years. It doesn’t matter whether or not they’re actually repairs and maintenance expenses, or capital improvements.
But, after you place a property in service, part of your rehab costs are classified as repairs and maintenance expenses, which are deductible in the year you pay for them.
Tangible property under $2,500 also becomes deductible thanks to the de minimis safe harbor.
This means you only want to rehab the property up until its rent ready, then place it in service. Once its rent ready, place the property in service and complete the work.
Here are some example rehab expenses before the property is in service:
- Fixing structural issues (i.e. cracks in the foundation)
- Replacing an entire roof, floor, bathroom, kitchen, or plumbing system
- Adding a deck or new HVAC system
Here are example rehab expenses after the property is in service:
- Painting
- Carpeting
- Refinishing a wood floor
- Installing appliances
- Replacing a doorknob or window
- Repairing an existing plumbing system
Tax Consequences
When you capitalize and depreciate rehab expenses, you are recovering the cost and spreading out the tax savings over many years. And when you sell the property, you must pay a 25% depreciation recapture tax on the accumulated depreciation taken over the years you owned the property.
But if they are immediately deductible, you recover the cost and benefit from the tax savings immediately. And there is no depreciation recapture tax later.
Therefore, it is in your best interest to place a property in service as soon as possible. Which, again, is as soon as it’s the rent ready. You can finish the rest of the rehab after.
Tying it All Together
Let’s say you purchase a distressed property and it needs a lot of work before its ready to rent (i.e. a gut rehab). You work with your Certified Public Accountant (CPA) to come up with the following rehab plan:
Phase I – Before the property is in service.
- Gut and replace the kitchen and bathroom
- Replace the flooring and sheetrock
Total cost $14,000
Phase II – After the property is in service.
- Paint the walls
- Carpet the bedrooms
- Install appliances
- Replace a few shingles on the roof, a doorknob, and a broken window
Total cost: $5,200
You will capitalize and depreciate Phase I of the rehab costs of $14,000 over 27.5 years. This means you will receive a depreciation deduction of $509/year. Assuming you’re in the 22% tax bracket this yields a tax savings of $111.98 per year. If you hold the property for 10 years before you sell it, you will save a total of $1,119.80 due to depreciation.
When you sell the property, you will have to the pay $1,272.50 in depreciation recapture tax. Which is 25% of the $5,090 depreciation you took over the years. In this case, you lost $152.7 because of depreciation recapture.
But the Phase II rehab costs of $5,200 are immediately deductible, saving you $1,144 in taxes in one year. And when you sell the property, you don’t pay any of it back in depreciation recapture tax.
What if you did the entire rehab before the property was placed in service?
You will need to capitalize and depreciate the entire rehab costs of $19,200 over 27.5 years. And your depreciation deduction in $698/year.
Assuming you’re in the 22% tax bracket this yields a tax savings of $153.60 per year. If you hold the property for 10 years before you sell it, you will save a total of $1,536 due to depreciation, but have to repay $1535.60. Here you break even on depreciation.
The Bottom Line
When you purchase a property that requires rehab work, the date you place your property in service can have a big impact on the amount of tax you owe at the end of the year.
You want to do just enough work to get the property rent ready and then place it in service. After that, you can complete the rest of the rehab. This will maximize the number of expenses that are immediately deductible and not subject to depreciation recapture, which can save you thousands in taxes. Especially when you buy larger properties.
So next time you purchase a property, be sure to review your rehab plan with your CPA for maximum tax savings.
The post How to List a Rental Property and Save on Taxes appeared first on Avail.
]]>The post 2017 Tax Act’s Effect on the Residential Rental Property Owner appeared first on Avail.
]]>
As you know, Congress enacted tax legislation at the end of 2017. The changes are effective primarily for transactions occurring after December 31, 2017, thus affecting your 2018 income tax return.
From a rental property owner’s perspective, we are going to highlight:
- State income taxes and real estate taxes
- Interest expense limitation
- A newly created 20% business deduction
- Immediate tangible property expensing
- Depreciation expense
- Use of net operating losses
- Like-kind exchanges
- A few miscellaneous individual income and estate tax law changes
- A reminder of the real estate professional rules
This is not an exhaustive list of the changes and you should discuss with your tax advisor how they affect your specific situation. Please note that the IRS needs to issue guidance that interprets these law changes.
Real Estate Taxes and State Income Taxes
By now you have heard that your personal real estate tax and state income tax that you have claimed in the past on Form 1040 Schedule A as itemized deductions will be limited to $10,000. That limitation does not apply to real estate taxes associated with a rental real estate business reported on your Form 1040 Schedule E. Those real estate taxes will still be fully deductible given there is a bona fide business purpose and there is no personal use limitation.
Unfortunately, your state income tax deduction will be subject to the combined $10,000 limitation, regardless that the state tax is generated in part by your rental business.
Interest Expense
There is a new limitation on the number of business interest expenses that you can deduct in any one year. However, this limitation only applies if your aggregate gross receipts exceed $25 million.
Qualified Business Income Deduction
This is a newly created income tax deduction for qualified businesses, which includes residential real estate rental. What is nice about this deduction is you do not have to pay for the deduction; it is “free” and effectively reduces your overall income tax rate.
In general, you may deduct 20% of your net rental income from your overall personal taxable income. If your overall taxable income is less than $157,500 ($315,000 if you are married and file a joint return) then this amount will not be subject to further limitations. If your taxable income is over the above- mentioned thresholds, then you have to calculate two limitations on your 20% deduction:
- The first limitation is 50% of the rental activity’s taxable wages. Congress realized that wages paid in a rental business are generally negligible.
- Luckily, the second limitation is 25% of business wages plus 2.5% of the business’s unadjusted basis in depreciable property (including the building) – subject to certain limits and timeframes. You are allowed to use the higher of the two calculated limitations to compare to the overall 20% deduction. You then claim the lower of 20% of business net income or the limitation amount.
As an example, you rent a house that costs $500,000 and you pay an employee $500 per month to manage it. The two limitations are $3,000 ($500 wages X 12 months X 50%); or $14,000 ($500 wages X 12 months X 25%) plus (2.5% X $500,000 building cost). This would allow you to claim the full 20% deduction if your net income from the property were $70,000. If you are paying tax at the highest 37% marginal rate, the $14,000 deduction saves you approximately $5,180.
Depreciation Expense
Bonus depreciation is expanded to 100% of the property’s cost, regardless if it is new or used, for property placed in service after September 27, 2017. Bonus depreciation applies only to personal property (not the building) with a useful life of less than 20 years. Section 179 expensing, which also allows for immediate expensing of capital improvements, has been expanded both through limit increases and by what types of property qualifies for the deduction.
Previously, personal property used in rental properties such as furniture, refrigerators, ranges, and other equipment used in living quarters were ineligible for the Section 179 deduction. Under the new law, these assets are eligible for the deduction.
One tax planning strategy to consider is a cost segregation study (cost seg). In essence, a cost seg is performed by an engineer to “break down” the building into its separate parts and allocate the cost between the building, and the personal property included in the building’s cost. Cost segs have been available for some time, but now that you can include the acquisition of used property and immediately expense it, it will be critical to determine what benefit there could be in accelerating some of those deductions.
Net Operating Loss
Before the law change, if you had an overall loss on your personal income tax return, you may have been able to carry such loss back to your prior two years’ returns and claim a refund for taxes paid in those earlier years. If you decided not to carry back the loss, you could carry forward the loss to future years (not beyond 20 years). For years starting after December 31, 2017, you cannot carry back your net operating loss; you can only carry it forward to offset future years’ taxable income.
Related to the cost segregation opportunities available, if you are eligible to accelerate your 2017 depreciation deductions you may create a net operating loss and carry back the loss to 2015 and 2016. You have time to complete the 2017 cost seg until the extended due date of your return, October 2018.
Like-Kind Exchanges
Congress had discussed eliminating the like-kind exchange rules, whereby a taxpayer can defer the gain on a property sale if he or she exchanges or purchases another similar property within a set period. The new law keeps in place the like-kind exchange rules for real estate, but eliminates the deferral on personal property exchanges.
Miscellaneous Individual Tax Changes
A few other tax law changes are worth mentioning. The top individual income tax rate will be 37%, rather than 39.6%. The tax brackets have also widened providing lower effective tax rates.
The alternative minimum tax (AMT) was not repealed for individual taxpayers; however, the exemption and exemption phase-out limits have been increased.
Also, an individual’s gift and estate tax lifetime exemption has doubled to approximately $11.2 million for 2018. Now, a married couple can gift or pass through an estate with a combined $22.4 million of value.
Please keep in mind that each state has their own rules regarding estate taxes.
Real Estate Professional
Even though it was not a part of the new legislation, it is critical to understand the real estate professional designation that is available to taxpayers involved in real estate. The main tests are whether more than half of your personal services performed during the year are within the real estate industry and whether you spend more than 750 hours in such service.
A real property business includes development, construction, acquisition, rental, management, brokerage, etc. If you own multiple properties and spend 750 hours in total on all the properties, you should consider the election to aggregate the activities on your income tax return. The real estate professional status allows you to deduct the rental losses without being limited by the passive activity rules, as well as avoid the additional 3.8% net investment income tax on net rental income.
Takeaway
The new tax legislation will benefit residential rental property owners. Here’s a recap of some of the biggest wins:
- Deduct 20% of your net rental income from your overall personal taxable income
- Lower effective tax rates
- Bonus depreciation is expanded to 100% of the property’s cost
At Avail, we’re building a community of responsible DIY landlords and tenants by providing them end-to-end tools, education, and customer service to support them in their rental experience.
Guest Blog Bio
Steven Glover and Sean Smetana are tax professionals with Miller Cooper & Co., Ltd., a Chicago area CPA firm. You can reach them at sglover@millercooper.com and ssmetana@millercooper.com.
Disclaimer
This publication contains general information only and Miller Cooper & Co., Ltd. is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Miller Cooper & Co., Ltd. shall not be responsible for any loss sustained by any person who relies on this publication.
The post 2017 Tax Act’s Effect on the Residential Rental Property Owner appeared first on Avail.
]]>The post Prepare for Tax Season With the Avail Payment Report appeared first on Avail.
]]>
One of our most requested features from landlords is the ability to export rent payments to a spreadsheet. This is helpful for you and your accountant when preparing taxes, and with tax season just around the corner, we want to show you how to easily download a spreadsheet of your rent payments.
Here’s what the report will include and how to find it in your Avail account:
The Payment Report
Your rent payment report is automatically generated for you when you collect rent online with Avail. If you don’t collect rent online with us, you can manually add your rent payments to your Avail account and generate this report.
As you can see above, the report includes:
- Tenant’s Name
- Street Address
- Unit Number
- Date Paid
- Payment Amount
- Payment Status
Where to Find Your Report
You can log into your account to find your rent payments report. Once you’ve logged in, you’ll see your dashboard. As you can see below, you can download the report directly from your dashboard under the “Reports” tab.
When you click “Download Report,” you’ll receive a .CSV file that will open in Microsoft Excel.
Tax Deduction Tips
Join us for Tax Tip Tuesday across our social channels, where we provide need-to-know tax tips and information for DIY landlords. Follow us at @HelloAvail.
What’s Next?
Need to simplify tax season? Start collecting your rent online with Avail to automate your year-end rent reporting and access all your rental property tax information in one place.
Learn more about the benefits of collecting rent online.
The post Prepare for Tax Season With the Avail Payment Report appeared first on Avail.
]]>