How Owning Rental Properties Will Affect Your Taxes
Owning rental properties will change how you do your income taxes. You must claim all of the income that you get from your rental properties on your tax returns each year. You must pay taxes on that income appropriately. However, filing taxes on your rental properties don’t have to be as extraordinarily difficult as one might think.
There are two main ways that your taxes change when owning rental properties and those are: a) how you claim the income from rental properties on your taxes and b) how the IRS handles the eventual sale of your rental properties.
The Short Version of How Rental Properties Affect Your Taxes:
We will cut right to the chase here and discuss how rental properties will change how you file your taxes. For your regular income, income from your properties is taxed just as any other ordinary income would be if you were to work a full-time office job for a company or another third party. As a rental property owner, you can also lower your taxes using several different techniques to help keep the amount of money you owe in taxes as low as possible.
The key here is that the IRS only requires you to pay taxes on the money that you make off of your rental properties. Any money that you put back into the properties can be taken as tax write-offs. This includes anything from bookkeeping supplies used to run your business to money spent on renovations such as putting new flooring into your rental property, painting the property, or even things like purchasing new furniture.
What Do I Have to Pay Taxes On?
The IRS considers the following to be a source of taxable rental income:
- Payments of rent that you receive including those made in advance.
- Any parts of the tenant’s security deposit that you keep.
- Any expenses your tenant pays while residing on the premises.
- Any utilities or other expenses the tenant is obligated to pay while living in the residence.
All of these different sources of income must be claimed in your taxes in order to ensure that you are paying the IRS exactly what is owed.
What Expenses Can I Deduct from My Rental Incomes?
There are quite a few expenses that you will have as a landlord, and you are free to deduct those expenses from the taxes you pay long as you can prove that you paid those expenses. The following are a list of some (but not all) of the expenses that you may deduct from your taxes:
- Any costs associated with cleaning and maintaining the property (including between tenants)
- Mortgage interest
- Insurance costs
- Money spent on advertising
- Payments to property managers
- HOA dues/condo association fees
- Services provided by the landlord
- Legal/professional fees related to being a landlord
Taking these tax deductions can save you $100s to $1000s on taxes each year. Be sure to save the receipts and document each expense to ensure that you can prove to the IRS that you actually incurred these costs.
Be Sure to Claim Your “Depreciation” Expense:
This might be one of the best tax breaks available to landlords when it comes to rental properties. One example would be appliances that depreciate over time. If you purchase a microwave for $500 and the microwave is expected to have a lifetime of 5 years or more, you might deduct $100 a year from the taxable income on that property. Over the 5-year lifespan of the microwave, you deducted $500 from your taxable income, making your investment in the property pay for itself.
How Do I Report Rental Income?
Rental income will need to be reported on your tax returns using Form 1040, Schedule E. On this form, you will have to list information such as your property’s rental value(s), expenses, and deprecation. You will have to be able to prove all of the numbers that you provide, so carefully log and file receipts and proof of payment in order to make this easier when it comes to tax-filing time.
If you have more than three rental properties you will need to use more than one copy of Schedule E to claim all of your taxable income from rental properties.
This is our quick guide to how to claim your rental properties on your tax returns. For more information on how to ensure that you are paying all of the taxes that you owe on the rental properties that you have, please feel free to contact us! We are here and happy to help you save money where you can while helping you tile your taxes according to the IRS rules so you don’t find yourself getting penalized later on.