Reporting Rental Income: Tips for the Taxpayers

Property Management Blog

Tax is an important part of our lives and it is more important for the rental property owners. They need to report all the income from rental units and file the tax return appropriately. Taxes are frightening not only for the new landlords but for the experienced property owners as well. Wrong tax move can be destructive for your rental business, so you should be very careful about it. Here we are discussing a few tips which will help you to report your rental income properly. You will be able to file a tax return without any trouble. 

What is rental income?

It is important to understand what rental income is. The money you receive for the use of your property is called rental income. You need to report income for all your assets for tax purposes. Other than monthly rental payments, all the other amounts which you charge from renters should be recorded on your tax returns. 

Advance rent: Advance rent is the money you receive before the rental period. It is incorporated into your income when you receive it. 

Security deposit: the security deposit is also considered advanced rent but it is used as the final rent payment. If you have to return the security deposit, when the tenant leaves your place, you should not include it in your income, even after receiving it. However, if you will keep the money for the whole year as your tenant is not following the lease rules, you have to add it to your income. 

The basic difference between advance rent and security deposit is the management. 

Is rental income taxable?

Many new investors ask this question and the answer is, yes. However, everything you get from the tenants does not come under this umbrella. You can reduce the rental revenue, as you have to deduct the expenses you spend on maintaining your property. If the income is less, your tax will also be reduced. 

Tax deductions for rental property owners

Rental property owners are entitled to several tax deductions. For instance, property tax, mortgage interest, depreciation cost, and maintenance charges are new examples of these deductions. You can deduct expenses that you spend on managing and maintaining your rental home. necessary expenses may include insurance, maintenance, taxes, and utilities. Moreover, landlords are also entitled to deduct the prices of materials that are used to keep the property in good condition. 

Charges which landlords cannot deduct

Property owners cannot deduct the renovation costs. Depreciation can be used to recover the cost of modifications. At the start of the year, you can add new furniture or upgrade the existing one. 

7 tax deductions for landlords

The real estate business, particularly the rental business, has many tax advantages for landlords. If you own a rental property, these are the 7 tax deductions you can take the advantage of. 

Interest: It is the largest deductible item for the property owner. The land owner can deduct mortgage interest on loans, which are used to buy the property or renovate it. if he has used a credit card for the services in the rental business, he can deduct the interest on that too. 

Rental Depreciation: No matter whether it’s an investment property or an apartment building the actual cost is not deducted during the year when it was purchased. The property owner will recover the investment through depreciation. It means a percentage of the total price of the property will be subtracted over a period of time. 

Repairs: if you renovate your rental property, you can deduct the charges during the same year. Deductible repairs may include repairing the house, repairing floors and leaks, replacing broken windows, and clearing clogged gutters. 

Travel: If owners have to travel for their rental business, they can claim tax deductions for that. For instance, if you have to buy a repair item for the rental home from a distance, you can deduct the travel expenses. However, you cannot deduct the up-gradation cost. 

Insurance: you can deduct insurance premiums for your rental home. it may include flood damage, fire, burglary, etc. however, if you have any workers, you can’t deduct their health care insurance. 

Office at home: If you use your home as your office, you can deduct the charges for this office. Office space and any other place of your home which you use for the rental business can be charged and deducted. 

Personal possessions: if you are using personal possessions in rental service, you can deduct that too. appliances, furnishings, and gardening equipment are a few examples of processions. 

Documents a landlord needs

If you want to claim the above mentioned deductions, any one of all of them, you need to keep your document ready. The documents you may need are the following. 

  • Loan documents

  • Insurance policies

  • Tax record of previous years

  • Property investment documents

  • Any permits related to property

  • All legal documents

  • Tenant contract

The authorities can also ask about the income and expenses-related records. For instance, receipts of repair and rent payments, mortgage interest documents, utility bills, credit card bills used for rental business, and fees of lawyers. Keep an accurate record of these documents. 

The function of rental income tax

If you rent out a property for more than 15 days every year, it will be considered a rental property. It can be a condo, an apartment, a vacation home, or a whole building. The revenue which your rental property generates is taxable. It is the net regular income that you have to file in your tax return. 

Real estate investors can use rental income calculators, which are easily available online. It can help to calculate the projected rental income in a particular neighborhood. You have to enter the information about the property and these calculators can tell your information like cash flow and cash return. Similarly, mortgage calculators are also available to facilitate property owners. 

Being the owner of rental property has many advantages. But you must be aware of the tax deductions you are entitled to, otherwise, you will lose a lot of your money. 

If you’d like to talk more about property management, or you need help with Everest Property Management, please contact us at Everest Realty.

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