Landlords who own rental properties that earn an income from them, have a federal tax responsibility to file income tax returns each year. The Internal Revenue Service (IRS) defines rental income as any payment received for the use or occupation of property including normal and advance rent payments, security deposit, expenses paid by the tenant, tenant payment for lease cancellation, and property or services received as rent in place of money.
Rental income taxes can be challenging for landlords as there are several factors to consider to ensure that your business doesn’t get penalized by a wrong filing. Some of the challenges rental property owners face during tax season include:
- Numerous financial uncertainties that come with the pandemic
- Inflation is at a high and continues to soar
- Eviction moratoriums ending
- Rents rising to record levels
As a landlord, you are a business owner who is seeking to maximize income, and to ensure that this happens, you need to have several things in order. These begin with the onboarding stage where you ensure that your tenants are adequately screened before accessing your property.
There are also some tax benefits and deductions that landlords should know about when filing their annual returns to maximize their ROI. To learn some tips to make tax season worry-free, keep on reading.
Top Landlord Tax Deductions
Maximizing returns is critical for owners and thus you need to be aware of the tax deductions available for you. It’s critical to note that the Internal Revenue Service will require the rental property owner to adequately support their claims with documented proof.
These deductions can be claimed during tax filing to reduce the total tax payable to the IRS. Below are some of the deductions landlords can take advantage of:
Rental Real-estate Property Depreciation
Long-term assets depreciate over time and this decreases the value of the asset. When filing returns, the landlord should take into account the quantified level of depreciation to tax the correct property value. You should consider hiring professionals to determine the correct level of depreciation your property has undergone as there are varied techniques to derive the correct rate depending on the asset type.
As a landlord, you have most certainly purchased several insurance plans for your rental property. These can include landlord liability insurance, fire insurance, burglary insurance, and flood insurance. During tax remittance, landlords are permitted by the IRS to deduct some of these premiums paid to insurers.
A rental property is sure to experience levels of wear and tear or damage over time. These will require the landlord to invest in repairs to ensure that their tenants are protected and that the property remains suitable for renting.
For repairs to qualify as a deductible they are required to be necessary, ordinary, and reasonable in amount. These include property repainting costs, gutter and piping repair, and broken windows repair. Landlords are eligible to claim these deductions when filing their rental income tax returns.
With the COVID-19-influenced changes in real estate practices, there have been several unprecedented changes in the industry. Some of these changes include social distancing, transition to virtual property showings, and eviction moratorium regulations introduced.
With these challenges coupled with limited access to financial resources, small and independent landlords received approximately 50% of their expected income during the pandemic as tough financial conditions came on the tenants according to a report by The Harvard Center for Housing Studies.
The resources made available to landlords, to help mitigate these losses, included $25 billion worth of rental assistance in the 2021 COVID-19 relief package. Rental property owners were allowed to apply for funds on behalf of their tenants along with other resources such as webinars, forms, news sources, and editorials.
Records Needed for Tax Season
Accurate record-keeping is mandatory to support all the deductions sought by the landlord. The landlord has to verify the validity of their requests such as proof of valid repair costs, premium payments, and depreciation of the property in that tax year.
Some of the records that must be maintained in good order for the IRS to approve the discussed deductions include:
- The leases or written agreements with the tenants
- All legal documents required for the property including fines
- Inspection reports
- Court appearances
- Any permits were taken out of the property
- Insurance policies
- Loan/mortgage documents
- Past tax records
- Any documents pertaining to the rental property
- Real estate investment papers such as property title deeds
Given the specificity required in filing rental income tax returns, landlords also need to prepare other documents supporting their tax deduction claims. These include property marketing costs, loan interest, business credit cards, legal fees, repair receipts, rent payment receipts, and utility costs receipts where applicable.
How to File Your Taxes
Landlords file their annual taxes depending on their ownership of the property. The scenarios are when the property is individually owned when the property is co-owned, and when the property is owned through a business entity.
Individual rental property owners file IRS Schedule E, Supplemental Income and Loss and rental property co-owners each file their own tax return, using Schedule E.
Where the property is owned by a business entity, income and deductions from the property are made using IRS Form 8825, Rental Real Estate Income, and Expenses of a Partnership or an S Corporation. There are additional filing requirements reliant on the type of business entity.
Staying on top of all these tax filing details can be particularly challenging for both new landlords and seasoned ones. Additionally, you do not want to be on the wrong side of the IRS as it can put your rental property business in jeopardy. T-Square Properties is an expert property management company that will help you and ensure your business is compliant.
Additionally, our company can help in handling tenant evictions, your property maintenance, and repairs, potential-tenant screening, tenant lease agreements/contracts creation, and can provide top-notch property marketing to ensure you achieve your occupancy goals. Contact us today to learn more about our services!