Let me just start be saying that being landlord is a total pain in the a$$. I know this from my vast experience with single, multi-family and commercial property rental. Another item of note: you will not make money on rental property until you have 4-6 properties going. The more properties you have, the more money you will make and the less fun you will have in life. But its worth it right - who doesn't love a 2am phone call that their roof is leaking or their toilet is clogged or their neighbors are being too noisy etc etc!
Below is some basic info you need to know for just getting started with rentals:
Reporting Rental Income and Expenses: Your rental income and expenses should be reported on Schedule E of your tax return. This includes the rental income you received from your tenant, as well as any expenses you incurred to maintain the property, such as repairs, insurance, and property management fees.
Depreciation: The IRS requires you to depreciate your rental property over a period of 27.5 years. This means that you can deduct a portion of the property's value each year as a depreciation expense. However, when you sell the property, you will need to recapture any depreciation you claimed during the years you owned the property. This recaptured depreciation is taxed at a higher rate than regular capital gains, so it's important to plan for this tax liability when you sell the property.
Deductible Expenses: You can deduct a wide range of expenses related to your rental property, including property taxes, mortgage interest, repairs, and maintenance costs. You can also deduct expenses for travel, such as mileage to purchase supplies or visit the property for inspections. Keep in mind that only expenses related to the rental property are deductible, not personal expenses.
Non-Deductible Expenses: While you can deduct many expenses related to your rental property, there are some expenses that are not deductible. This includes your own labor and time spent working on the property, as well as any expenses for personal use of the property.
Record-Keeping: It's important to keep accurate records of your rental income and expenses throughout the year. This includes receipts for any repairs, maintenance, or improvements you make to the property. Consider using a spreadsheet or accounting software to track your rental income and expenses, as well as any rent payments and late fees.
State Laws: Keep in mind that rental laws can vary by state and locality. Make sure you understand the specific regulations and requirements in your area, such as maximum late fees, security deposit rules, and eviction procedures.
Consult with a Professional: Owning a rental property can be complex, so it's important to work with a tax professional who specializes in rental properties. They can help you navigate the tax implications of owning a rental property, and ensure that you are taking advantage of all available deductions and credits.
In my next blog I will chat about more complex items in rental taxation: cost segregation studies, 1031 exchanges and passive losses.
laura@walker.tax
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