The implications associated with rental property tax deductions should not be underestimated. A sound tax strategy can turn a good asset into a great one, and a great asset into something far better than you could have imagined. Few things, for that matter, are more beneficial to today’s investors than rental property tax deductions. Continue reading to learn how to navigate the process yourself and reap the benefits.
There are no records today’s rental property owners shouldn’t hold onto. The more documentation retained from business operations, the better off investors will be. It is unequivocally better to be over prepared when it comes time to do your taxes than to be underprepared. Maintaining extensive records should give landlords something to look forward to come tax time, instead of something to fear. Successfully managing a rental property is challenging enough without having to worry about an audit from the IRS, let alone an entire portfolio of assets. Therefore, it’s in the best interest of today’s investors to hold onto as many records as they can.
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The following records represent those documents that should prove useful for years to come, and not just on the current year’s return:
Don’t let the short-term designation fool you; these records should represent at least five years worth of documentation—give or take a few years depending on your own comfort level. The idea is to protect yourself in the event you are audited or—maybe even worse—sued. Again, the more documents you retain, the better. The documents should include any income or expenses for given years, not unlike the following:
Rental income, as most people would assume, is comprised of the payments landlords receive from renting out a property. Rental income isn’t relegated solely to the rent check one receives each month, but instead includes any other payments received as a result of the property’s use. More specifically, the IRS defines rental income as “any payment you receive for the use or occupation of property.” In addition to the actual rent check, rental income also includes the following:
Both income and expenses resulting from renting out a property are to be reported on Form 1040, Schedule E, Part I, according to the IRS. Regardless of whether the asset being rented is an entire building, an apartment or a single room, the generated income and expenses go on the aforementioned form. In addition to the income and expenses, landlords should be sure to include depreciation for each asset on the Schedule E form.
In the event an investor is reporting rental income for a larger portfolio of properties (more than three), they will need to complete and attach as many Schedule E forms needed to list the assets. Lines one and two will both need to be completed for each Schedule E form, not excluding the property address. The “Totals” column, however, only needs to be filled out once, regardless of how many Schedule E forms are attached.
Rental properties have become a popular wealth building vehicle for savvy real estate investors. It is worth noting, however, that rental properties build wealth in two specific ways: they make money and they save money. Of course rental income can contribute to one’s bottomline, but many people don’t realize how much a good rental property can save investors come tax time. After all, it’s true what they say: a penny saved is a penny earned. Let’s take a look at some of the best rental property tax deductions many investors count on to save their own pennies:
Few things, if any, will actually impact an investor’s bottomline more so than the way they manage their own rental property and taxes. It is up to today’s entrepreneurs to not only familiarize themselves with how to navigate rental property taxation, but also use it as a tool. A sound understanding of the tax benefits associated with rental properties can turn a good asset into a great one.