It’s that time of year again. Uncle Sam will soon be looking for his cut of your profits in 2020. Filing your taxes and handling the details with regard to your rental property will require certain steps following the guidelines of the IRS. And if you already have a tax professional on board to help you, you’ll likely be set with compliance. But there are steps you’ll need to take and things you’ll need to know to handle your taxes. Some of these tips will serve as friendly reminders to the veteran rental investors. And for those of you who are filing for the first time, you’ll likely find these nuggets of clarification helpful as you prepare.
What Deductions Can You Take as a Rental Property Owner?
One of the first clarifications rental property owners often need is in regard to potential deductions. You can always review the guidelines with the IRS directly or discuss your plan with your accountant. But in general, expenses that usually count as a deduction include mortgage interest, operating expenses, repairs, property taxes, and depreciation values. There are ordinary expenses and necessary expenses that, by definition, can help you sort your roster of annual expenses. Ordinary expenses are common costs associated with doing business. Necessary expenses are typically those costs of supplies, materials, maintenance, or repairs.
What Records Should You Prepare?
Good recordkeeping is a must when you own and manage rental property. Throughout the year, documenting revenue and expenses will help streamline your tax prep process. In addition to your financial statements, be prepared to provide proof of expenditures and rent payments. Service agreements you have in place with vendors are just as important as the signed lease agreements you keep, as well. Invoices, bank statements, and receipts of purchase should usually be part of your recordkeeping. In the event of an IRS audit, you’ll need to have a way to effectively prove what you’re claiming as profit, loss, or deductions when you file.
What About Travel Expenses as a Rental Property Owner?
If you own property somewhere other than where you live, you can absolutely deduct travel expenses associated with visiting or managing your property. Be diligent about your receipts, documentation, and reasons for travel. Hotel stays, meals, and mileage are all trackable expenses. The rules for travel deductions are outlined in the IRS Chapter 5 of Publication 463, covering travel, entertainment, gift, and auto expenses. If you don’t feel like reading through IRS codes, you can always discuss your travel expenses with your accounting professional for clarification.
What Forms Do Rental Property Owners Need to File?
Documenting your rental income for taxes will usually require a Form 1040 with a Schedule E attachment. These forms will allow for listing your total income, costs, and depreciation for each rental property you have in your portfolio. Here you will outline everything from advertising to insurance expenses for each rental. Also, if you’re unincorporated and have collected $600 or more in the form of a check, cash, or direct deposit, you’ll likely need to file a 1099-MISC. This allows for the potential qualification of important tax benefits, including a 20% pass-through deduction. Again, if you’re still unsure about where to find these forms or which apply to your rental business model, an accounting professional can help.
Tax season for a rental property owner doesn’t have to be stressful. If you’ve discovered that your recordkeeping for 2020 was less than organized, or you still need direction about accounting and bookkeeping for your rental property investment, contact us! At PMI CONTRA COSTA, our professional rental property managers are experts at organizational record keeping and task management.