Tax season is close at hand, but are you prepared? Before you start rushing to see if you’ve saved all your receipts, take some time to review what common rental property deductibles you can utilize this tax season. With just a few minutes you’ll save time and money with your organizational and tax-savvy prowess.
Check Off These Tax Deductions
As you already know, rental income is taxable. Whether or not you think Park and Recreation’s Ron Swanson’s tax joke is funny, if you own a rental property you still have to complete tax form 1040, Schedule E. That being said, you can reduce your rental income on your taxes by subtracting expenses made when getting your property ready to rent and for maintenance. According to the IRS, common deductible rental expenses are:
❐ Advertising and Tenant Screening
❐ Travel expenses
❐ Cleaning and maintenance
❐ Interest (other)
❐ Legal and other professional fees
❐ Local transportation expenses
❐ Management fees
❐ Mortgage interest paid to banks
❐ Rental payments
While this might seem pretty self-explanatory, when it comes to taxes nothing is totally clear-cut. For example, the way you record improvements is different than you would record repairs. According to TurboTax®, property improvements (like adding a swimming pool) are generally capitalized and depreciated over several years, not deducted the year you paid for the service. Repairs (like painting), on the other hand, can be immediately written off the year you paid for them. If you need to calculate depreciation for your rental (on Form 4562), TurboTax® gives a good guide. Of course, the IRS has a full explanation on property depreciation.
Another tricky deductible can be travel expenses. If you’re using your personal vehicle for rental activities then you can deduct the portion that you use for business purposes. Typically most businesses apply a per-mile rate to the total business miles they had in that year. For 2015, the IRS has set that mileage rate at 57.50 cents per mile. However, if you believe you can get a better deductible, according to TurboTax® you can take the percentage of your business miles you’ve accumulated and then apply that percentage to your total vehicle costs (gas, insurance, repairs, etc.). While this method might be beneficial, that being said, you’ll need to have immaculate records to justify your final deductible. So tread lightly.
In addition to claiming travel expenses, you can also deduct your home office as long as it’s dedicated to your business. You can base your business deduction on the home office’s sq. footage divided by your house’s sq. footage or by how many rooms your business encompasses versus your house’s total number of rooms. The IRS allows you to use a prescribed rate to calculate your deduction. For 2015, the prescribed rate is $5 per sq. foot with a maximum of 300 square feet.
Tax Organization Reminders
You know the drill; if you make a claim, you have to back it up. Otherwise, if you’re audited, you might suffer huge losses from additional taxes and penalties. And let’s hope you take getting served as well as Ron Swanson did.
The IRS urges you to keep good records of your rental property, especially of rent and rental repairs. Using documentary evidence like receipts, cancelled checks, or bills are vital to keeping good records for this tax season and beyond. To do all this, William Perez, a tax practitioner in San Francisco, suggests using spreadsheets to keep track of the following things:
- Purchase price of the rental
- Accumulated depreciation and current annual depreciation
- Rental income
- Security deposits received and reimbursed
- Advertising costs
- Cleaning, maintenance, and repair costs
- Homeowners insurance and HOA dues
- Real Estate taxes and mortgage interest expenses
- Utilities, landscaping, garbage, travel, and other expenses
This might seem like a lot, but it’s well worth establishing these recording habits now than end up in trouble later. When it comes to what to do with all your receipts, consider investing in a lockable filing cabinet, a scanner, or using a Smartphone receipt app to take a photo and track. With these three things, you can start storing your receipts physically and digitally. You should have a digital copy of your receipts for up to 6 years. Mark J. Kohler suggests when you first get a receipt, write down notes on their business purpose that day. Relying on credit-card statements and canceled checks to tell you what you bought in October usually isn’t sufficient enough to jog your memory.
While you might dread doing your taxes, as long as you keep thorough documentation and good organizational habits, you can survive. When you’re ready to start tackling your taxes, use the IRS’s list (at the top) as a guide to make sure you leave no possible deductible untouched. As time consuming as it is, you’ll be happy once it’s all said and done and you have that big tax refund check in hand. Go ahead and treat yo’ self.
What are some ways you get ready for tax season? What deductibles do you tend to utilize the most? Leave a comment down below.
Subscribe to receive more great tips for your rental properties!