Know your deductions.
Unlike your primary residence, your rental home is considered a business. Therefore, the expenses associated with the rental can be used as deductions to lower your tax liability. This can include:
- Mortgage or loan interest.
- Mortgage or loan origination fees.
- Property and liability insurance(s).
- Property taxes.
- Management and/or leasing fees, if you choose to enlist the help of a property manager.
- Utility payments.
- Maintenance costs, including labor and materials, cleaning, yard care and other forms of upkeep.
- Travel and auto expenses, including mileage to and from your rental home.
- Legal and professional fees.
- Depreciation expense.
Understand what income to report.
A common statement I hear from clients around tax time is, “I didn’t get that much money from my rental property last year.” While it can be tricky keeping track of how much income to report from your rental home, there are a few key points to remember:
- Income is reported in the year the landlord receives it. For example, a tenant brings you January 2019 rent on Dec. 30, 2018. This rental income should be reported for tax year 2018, the year in which it was received, even though the payment is being applied to the next month, which happens to be in 2019.
- Security and pet deposits are not considered income until they are retained by the landlord to pay for damages to the property. The deposit money should not be reported as income when the tenant pays it at the beginning of the lease. Instead, the portion retained by the landlord at the end of the lease should be reported as income in the tax year the tenant moves out.
How the new 2018 tax laws affects rental property.
Like other businesses, rental properties are now entitled to a new pass through tax deduction so long as the rental property qualifies as a pass-through business. Sole proprietors, partnerships, LLCs and S Corps qualify. Under the new tax law landlords will now be able to deduct 20 percent of their net rental income. In other words, the rental property owner will pay taxes on 80 percent of their net rental income instead of 100 percent. While this is a great starting point, we advise all clients to consult with an accountant or tax advisor to ensure they are meeting all tax requirements specific to their return.