Landlord? Don’t Overlook This Important Tax Info

Many Americans own rental property. Whether you inherited a home, decided to downsize or upsize your personal residence, or just came across a great investment opportunity, people get into the landlord game for many different reasons and via many different avenues. Regardless of which category you fall into, all landlords must be sure to keep detailed records of income and expenses related to the property for tax time.

Deductions
If you are making money from the rental of a property that you own, then you must report the rental income on your tax return. Owning a rental property also means that certain expenses become deductible – thereby reducing the total amount of rental income that’s subject to tax.

Deductions vs. Depreciation

Deductions are very straight forward – these are the costs of operating, repairing, some improvements, and managing your rental property. These expenses should be tracked by the landlord (or his/her employee) and included, along with rental income, on Schedule E of the tax return. Depreciation, on the other hand, is not as straight forward. Generally, the basis or cost of the building (but not the land) is depreciated using straight-line depreciation which is done over 27.5 years. An equal amount of the building’s basis is deducted each year on the tax return. Any additions or improvements costing more than $2500 are also depreciated but are done so separately from the building. Additions or improvements costing less than $2500 can be deducted fully in the year of purchase.

Depreciation must be carefully tracked for tax purposes. Once the property is fully depreciated, no additional depreciation can be taken. Additionally, when a rental property is sold, the depreciation must be recaptured if the sale price of a rental property exceeds the adjusted basis (i.e. the owner’s initial investment plus the cost of certain improvements during ownership). Recaptured depreciation is reported as ordinary income for tax purposes.

Reporting Income and Expenses
At Levesque & Associates, we recommend clients track income and expenses either through bookkeeping software such as QuickBooks (appropriate if you own multiple investment properties) or through a simple excel sheet. You can also easily make use of apps such as Expensify to maintain and categorize receipts. Even though you are tracking the information, be sure to keep receipts with your personal records for at least 7 years.

Management Companies
Some property owners utilize a management company for collections of rent payments as well as property maintenance and other expenses. Typically, these management companies provide a 1099 in January of each year which summarizes the income earned by the owner. If you utilize a management company, we STRONGLY encourage you to keep your own records and compare the information you receive from the management company with what you have on file. Mistakes do happen and property owners should take responsibility for ensuring the accuracy of the of the information reported to the IRS.

Record Keeping
Good record keeping will not only help you determine the profitability of your rental property, but it will help make the preparation of your tax return much easier. Maintain records of everything related to the property. This includes keeping detailed receipts for any expenses such as repairs and improvements. You should also keep detailed records of all rental income received. Should you be selected for an audit, you will need to provide these records to the auditor. If you are audited and cannot provide proof of the expenses and income reported on your return, you may be subject to additional taxes and penalties.

 

 

Do you own a rental property? Make sure you are keeping records of the following items and providing to your tax professional at tax time:

  • All loan and interest payments
  • Repair receipts
  • Personal property costs (such as new appliances or lawn equipment)
  • Driving – if you have to drive to your rental property for any reason, you can either deduct actual auto expenses (gas, upkeep, repairs, etc) or mileage (learn more about mileage write-offs here).
  • Overnight travel, including airfare, hotel costs, meals, and other expenses, can be deducted if they are directly related to your rental property. Be sure to keep detailed records as the IRS is known to scrutinize these kinds of deductions.
  • Home office expenses, provided the landlord meets certain minimum requirements. This includes a percentage of the cost of home expenses including utilities, insurance, and more. Your tax professional will require total square footage of your home, square footage of dedicated office space, and a total of home costs
  • Do you pay an employee or independent contractor for help with your rental? Their pay is a rental business expense.
  • Any insurance you carry related to rental activity should be kept and provided at tax time.
  • Fees associated with legal and professional services such as an attorney, accountant, management company, etc.

Looking for more information? Get in touch with Levesque & Associates by phone or email.

Rules and Deductions for Vacation Rentals

Do you own a vacation home that you occasionally or regularly rent out to others?  It’s not uncommon for individuals to purchase vacation properties for personal use and to rent out the home part of the time to help offset the costs.  The following are common questions asked about vacation rentals:

1) How often do I have to rent out my property to receive tax deductions on the rental expenses?

To receive the tax benefits of a rental property, you must advertise the property for rent, be preparing the property for rent, or have it rented for fair market value at least 15 days in a calendar year.

2) What if I stay in the home a portion of the year?

If you personally use the property, in addition to renting it out to others, then special rules apply for how expenses can be applied as deductions, or written-off, on your return.  Expenses must be divided between rental use and personal use.  This means that only a portion of the expense will be applicable as a deduction on the rental income.  How the costs are divided is determined by comparing the total number of rental days versus personal use days.

3) What is the minimum number of days my property must be occupied by renters for it to be considered a rental property? 

Properties must be rented for at least 15 days in a calendar year to be considered a rental property.  If a property is rented for less than 15 days, rental income does not have to be reported and rental expenses cannot be deducted.

4) What if I rent the home to friends or family at a discounted rate?

If you are renting the property to anyone at a rate that is less than a fair rental price, the time of that rental is considered personal use and therefore cannot be counted towards total rented days in a calendar year.  What about the rental fees received from these discounted rentals?  You do not have to claim the fees received, but you cannot deduct any expenses associated with the rental in question.  These types of transactions are called Personal Use Transactions.

5) I don’t rent out my property enough for it to be considered a “rental property.”  Are there any deductions available to me?

If you do not rent your property enough for it to be considered “rental property” for tax purposes, you do not have to report the rental income, but you also cannot deduct rental expenses.  However, you may still deduct mortgage interest, property taxes, and casualty losses.

 

Resources:

(1) “Plan Ahead for Tax Time When Renting Out Residential or Vacation Property.

(2) “What to Expect at Tax Time if You Rent Out Your Vacation Home.