Real estate investors need a firm understanding of rental property and business taxes to maximize returns. When preparing for the next tax season, keeping track of revenue and expenses should be part of your year-round processes.
Some rental expenses can become valuable deductions to boost the benefits of a real estate investment property. Our Palm Springs property management professionals put together some tips below to help landlords maximize every deduction every year at tax time! Read below, and make sure you have an excellent record-keeping system in place for your rentals.
Understanding What You Can Deduct
When you receive rental income from a rental unit, such as a home, apartment, or another dwelling, rental expenses may reduce the profit in your pocket throughout the year. However, certain rental costs help reduce your tax liability at the end of the year and boost your returns. Knowing what you can (and can't) deduct keeps you compliant with IRS regulations and ensures that you won't miss a valuable deduction that can improve the returns from your properties.
Ordinary and Necessary Expenses
The first thing to note is that you can deduct what the Internal Revenue Service includes as ordinary and necessary expenses. Ordinary and necessary expenses are critical to help with property management and maintenance. If your property, for example, needs a new drain pipe to prevent a break or crack, this is a necessary expense to deliver a safe rental home for tenants. As a necessary expense, it becomes a tax deduction.
Beware of considering optional upgrades as a "necessary" expense. Deducting the cost of adding a swimming pool could lead to problems with the IRS. Other necessary expenses to include as deductions are the interest you pay on a mortgage to finance your rental, preventive maintenance costs, marketing, and utilities. You might also be able to deduct a modification for a rental in response to a reasonable accommodation request.
Insurance
If carrying the right insurance coverage seems like an unnecessary expense, you can deduct premium costs on your rental property taxes! Having the right insurance policies to protect your investments and help you recover faster after something goes wrong is a smart idea and a worthwhile expense. Keep track of your premiums payments throughout the year and report them as a deduction.
Rental Property Taxes
As with your private residence, property taxes for a real estate investment qualify as a deduction. However, many landlords overlook this deduction, so it's important to work with a property manager and an accountant when preparing for tax time every year!
Employees, Contractors, and Professional Services
Unless you handle every aspect of your investment property on your own, you probably pay for some help. Property owners can deduct many costs associated with maintaining a staff of full or part-time employees. If you use a network of contractors to maintain your rentals, deduct the costs of their services.
Landlords can also deduct fees for professional services, like a bookkeeper, lawyer, and property manager. If you haven't partnered with property management experts in Palm Springs, Ca, keep in mind that their professional services boost your returns, give you back your free time, and become a tax deduction for your rentals!
Depreciated Expenses
Most of the deductions we mentioned above can be fully deducted in the year that a landlord incurs the cost. However, other deductions must factor in depreciation where the cost and deduction are spread out over several years when processing your taxes.
Depreciated deductions include roof replacements or new appliances. You can recover the cost of these improvements beginning in the first year the improvement is put into service. If you get a new roof, for example, you can depreciate it over the useful life of that roof. The deduction will be a depreciation expense, a calculation made by the Internal Revenue Service that counts against the total value of the improvement.
Home Office and Travel
Where do you conduct most of your business for rental properties? If you're not showing a property or meeting with a contractor, you might have a home office. That space can qualify as another tax deduction if you use it primarily for conducting rental property business.
Keep track of your mileage when traveling to properties for official business. Airfare and other travel expenses can become a deduction when you visit your rentals to conduct business if you own rentals in Palm Springs while living out of state.
Don't Forget to Report Income
Deductions only count if your property generates rental income! While it's critical to be thorough when keeping track of expenses throughout the year, make sure you diligently track all income and report it on your annual returns.
A Palm Springs Property Management Company Helps You Maximize Deductions
Where do Palm Springs property management professionals come into play when it comes to helping investors with deductions? Property managers can track all income and expenses throughout the year, then work with your accountant to go through receipts and capture every possible deduction for you.
It's never too early to think about rental property taxes and getting organized! Let McLean Company help you maximize deductions for rental properties this year. Reach out, and let's talk!
To learn about how property managers help rental real estate investors download our free ebook, “The Guide to Finding the Best Property Management Company in Palm Springs.”
