Taxation of Rental Properties

Of course, the rent you make from properties is taxable income. But, in addition to these major paid responsibilities, there are many possible deductions that could lower total tax liability. In this context, rental property taxation can be classified as either of two kinds:

• Rental Income: Your income will consist of rental fees received and also, any additional income from the property, such as parking fees or pet deposits.
• Rental Expenses: Some of the Expenses are required to run the rental such as mortgage interest, property taxes, repairs, maintenance and insurance premiums that occurred during rental property ownership are also deductible.

One of the major benefits of owning rental property is the tax deductions you can claim, such as:

• Mortgage Interest: For many landlords, mortgage interest is one of their largest expenses, particularly during the early years of the loan when payments are heavily interest-focused. Luckily, the IRS allows you to deduct this interest from your rental income, which significantly reduces your taxable income.
• Property Taxes: In addition to mortgage interest, property taxes are another major deductible expense for rental property owners. These taxes, which are collected annually by local governments, often represent a significant cost. However, they can be fully deducted from rental income, which helps to lower your tax liability. 
• Depreciation: Another powerful tax advantage is depreciation, which allows property owners to deduct the cost of the building over its useful life, typically 27.5 years for residential rental properties. However, unlike other deductions, depreciation is a non-cash expense, meaning you don’t need to spend money to claim it. Instead, it accounts for the natural wear and tear on the property over time.
• Repairs and Maintenance: When it comes to maintaining your rental property, expenses related to repairs and maintenance are fully deductible in the year they are incurred, and this deduction offers immediate tax relief and reduces your overall taxable income. Moreover, it helps landlords preserve the property’s value and ensures it remains appealing to tenants, all without creating an excessive financial burden.
• Insurance Premiums: Similarly, landlord insurance premiums are fully deductible as a necessary business expense. These premiums often cover essential protections, such as property damage, liability, and loss of rental income. Consequently, by deducting these costs, landlords can manage risks associated with property ownership while reducing their taxable income.
• Utilities: If you, as a landlord, cover costs such as water, electricity, or gas, then you can deduct these from your rental income, this means that offering essential services to tenants doesn’t have to cut into your profits. Also, whether included in rent or not, being able to deduct these expenses helps landlords keep the property attractive without facing an additional tax burden
• Property Management Fees: Finally, property management costs can also be deducted from income, these services can include screening tenants, collecting rent, or maintaining the property, which also saves landlords a lot of time and work. As a result, this type of deduction allows a hands-off property management approach without harming profitability.

One of the biggest tax benefits available to real estate owners is depreciation, because it enables owners to write off the cost of the property over a predetermined length of time — 27.5 years, generally speaking, for residential rental properties. This deduction can provide significant tax savings over time.

To maximize their tax savings while preventing the IRS from coming after them, rental property owners should take the following things into consideration:

• Keep Detailed Records: Retain receipts for any expenses incurred regarding your rental property — including repairs, utility bills and even travel expenses related to visiting the property is the most important part during tax season. 
• Distinguish Between Repairs and Improvements: Repairs are typically deductible in the year they were made, but the enhancements have to be depreciated over many years. Repairing a broken pipe on the wall, for example, would qualify as a repair, whereas adding an extra room at your home would be an improvement.
• Vacation rentals vs long-term rentals: If you rent out a holiday home or an AirBnB flat, the tax rules can get a little complicated — particularly if you use the property yourself for part of the year.

Rental property ownership is never truly about collecting a check monthly — it’s about making the most profit. Here are a few tips you can use to lower your overall tax bill:

• Pass-through deductions: If your rental property is owned by a pass-through entity such as an LLC, you could potentially take a deduction up to 20% of your rental income for Qualified Business Income (QBI).
• Home Office Deduction: If you manage your rental properties from an office at home, the home office deduction must be taken into account.
• Use Professional Assistance: Tax laws change regularly, and rental property tax laws are no different, hence, a tax pro can help you find deductions you might miss on your own.

Rental properties have many benefits, but it is important to avoid mistakes that could lead to issues with the IRS or potential unqualified deductions. Here are three common reason for a tax complication:

• Downplaying Your Income: You need to report all rental income including security deposits which weren’t returned.
• Misclassifying Expenses: Each entry in the expenses category needs to be entered with proper care, like, the ordinary repairs, it should be deducted in the same year. However, major improvements should be capitalized and depreciated.
• Failing to Document Personal Use: If the rental property is also used for personal use, records should be maintained to identify the separate periods of personal use versus rental use.

For over 30 years here at Wasserman CPA, we have helped tons of rental property owners in South Jersey and surrounding areas and most of them still use our services. And, this proves that our skill level and the quality of service we offer are efficient and guarantees quality output. Here are our rental property taxation services (however, not limited to):

• Accurate Reporting: We ensure that all rental income is accurately reported in accordance with federal and state-level regulations.
• Maximizing Deductions: We investigate the potential deductions that can be taken through expenses, mortgages, and depreciation. Aside from that, we find ways to reduce your tax burdens.
• Record Keeping and Documentation: With detailed documentation, we provide accurate records for you to smoothen the process and is less time-consuming to ensure that potential deductions are not missed.
• Tax requires strategic planning: Wasserman CPA offers personalized tax planning strategies for one property or multiple.

Whether you are new to renting out properties or an experienced landlord, our team can assist you in understanding the rules in taxation of rental properties. Feel free to contact our team today for a consultation and experience our quality services assistance.