Every landlord’s favorite time of year is upon us. Yes, it’s tax season: that special time when a big chunk of your hard-earned rental property income goes sailing right out the window. But tax season doesn’t have to be difficult for landlords. In fact, if you know how to prepare rental income for taxes and take all the deductions you’re entitled to, it doesn’t have to be painful either.
How To Prepare Rental Income for Taxes
Here’s what landlords need to know about preparing their income taxes for residential rental property:
What counts as rental income
According to the IRS, the following forms of income are considered rental income, and must be reported as such on your taxes:
- Normal rent payments
- Rent paid in advance
- Earnings from lease termination fees
- Expenses that are paid by the tenant
Security deposits are not generally considered rental income because they are intended to be returned to the tenant. If the landlord keeps all or part of the security deposit, then it is considered rental income.
What you can deduct
Rental property owners can deduct a wide range of expenses related to their rental properties. The following are some of the expenses they may deduct on Schedule E (Form 1040):
- Maintenance, repair and cleaning costs
- Landscaping fees
- Advertising costs
- Utilities paid by the landlord
- Mortgage interest
- Insurance costs
- Rental or sales taxes
- Property taxes
- HOA or condominium fees
- Legal and professional fees (accountant, attorney, etc.)
It’s also important to remember that if you have any personal use of a dwelling that you rent (for example, if you rent one unit of a duplex and reside in the other) then you must divide expenses between rental use and personal use.
How to report rental income & expenses
Rental income from residential real estate is normally reported on Form 1040 or 1040-SR, Schedule E, Part I. If you own four or more rental properties, you’ll need to complete and attach as many Schedule E forms as are needed to list them.
What records to keep
In case you are selected for an audit, you will need good records. Make a spreadsheet for a digital record of all income and expenses. Receipts, canceled checks and bills are commonly used to support expenses.
Work with a Property Management Company
There are countless reasons why landlords choose to entrust their rental properties to professional property managers. Those reasons become especially clear as tax season rolls around.
In addition to traditional roles like filling vacancies and tending to repairs, property management companies also handle accounting and bookkeeping. That can be a huge advantage, especially for landlords who don’t excel at organization or have the time for bookkeeping.
Property manager responsibilities that can be helpful at tax time include:
- Collecting rent and accounting for all payments collected
- Annual reporting of all financial statements
- Issuing monthly income and expense reports
- Documenting all payments made on the landlord’s behalf
- Keeping records of maintenance estimates, work orders, invoices and payment receipts
- Compiling yearly tax information for the rental property business
Some property management companies will also help file your taxes on your behalf, although you are always free to use an external service if you prefer.
In addition, the cost of hiring a property management company is, itself, tax-deductible and can lower the cost of your tax bill. Landlords should always keep all of the invoices and statements issued to them by their property management company for tax purposes.
Contact us today to learn more about the advantages of professional rental property management, and talk with our team of experts about how we can make paying taxes as a landlord easier.