Owning real estate rental property can be a profitable business but it also comes with a lot of work. In addition to maintaining the property, managing repairs, advertising and more, rental property owners must prepare all year for the tax return filing. Having a tax plan in place throughout the year will help to make the end of the year filing less stressful and more accurate.
What Do I Need To Keep Track Of?
The best tactic for keeping track of income and expenses is to use a spreadsheet or software specifically geared towards rental property ownership. If you are using a CPA to help you with your taxes, you may be able to obtain a template or advice on software to use. Regardless of the medium you choose, here are the main items you will need to keep a record of:
- Keep any paperwork handy on the purchase of the property you are renting
- Depreciation worksheets from previous years
- Income received as rent, security deposits, trade agreements between you and the tenant where work is done in lieu of rent
- Normal and necessary expenses such as the mortgage interest, insurance premiums, advertising costs, repairs, maintenance, cleaning, lawn and pest control services, property management fees, utilities, taxes paid for the property and HOA/condo fees
Keeping a monthly record will help you avoid leaving off something that could make a big difference in your tax liability.
Passive Income Activity
Renting property is considered passive income. As passive activity, there are limitations to the deductions that can only be applied to lower a profit from the rental property. However, there are some exceptions. For instance, if you own at least 10% of the property, make decisions such as approving tenants and arranging improvements, this would allow you to deduct up to $25,000 of rental loss. Even so, the limitations continue because as your income increases, this deduction phases out. This phase out begins at a modified gross income of $100,000 and is completely eliminated after the $150,000 mark.
While depreciation is a great option for lowering your taxable rental income, there are some important factors to remember. Keeping track of depreciation can be a little confusing so hiring a professional to help with this may be a good idea.
Additionally, depreciation will need to be recaptured if you sell the property. As real estate doesn't actually depreciate, the IRS says if you sell and make a profit, your depreciation on the property must be recaptured. This means that the depreciation you originally claimed would need to be listed as taxable income. You can avoid this by doing a 1031 exchange. In short, you would use the proceeds from the sale of one property to turn around and purchase another property. This would allow you to defer the capital gains and the depreciation until you sell the new property.
As you can see, there are many tax planning factors to consider when owning a rental property. At Chandler & Knowles CPAs we can provide you with year round real estate tax services to make tax time less daunting. Call us today to schedule an appointment: (817) 406-3917.