For many landlords, March can be a stressful time due to the upcoming deadlines to file annual tax returns. The year prior to April is a crucial period for property investors to assess their financial standings, ensure compliance with tax regulations, and take advantage of available tax-saving strategies. As a housing provider, understanding the intricacies of the tax code and how it impacts landlords can significantly impact your bottom line.
Deductions for Rental Property Owners
One of the advantages of being a landlord in the United States is the ability to deduct numerous expenses related to the rental which can significantly reduce your taxable income. Do not overlook this benefit as it is the federal government’s incentive to promote the development and ownership of rental property. Schedule E of the federal form 1040 organizes the financial results of the rental property from the tax year and is how you report it to the IRS.
If you qualify as a real estate professional under IRS guidelines, you may be able to deduct rental real estate losses against your other income, reducing your overall tax liability.
Here are some key deductions to consider:
Mortgage Interest: Landlords can deduct the interest paid on mortgage loans for rental properties. Keep detailed records of your mortgage payments and ensure that the loan is used to acquire, improve, or maintain the property. The lender delivers a form 1098 form to owners of the property to make it easier to claim this deduction.
Property Expenses: Ordinary and necessary expenses related to the property can be deducted. This includes all expenses getting the property ready to rent, charges for finding tenants, management fees, repairs, preventative and on-going maintenance, utilities, HOA dues, etc. Homeowner insurance premiums and real property taxes can also be deducted and if they are paid to the lender in escrow who in turn pays those bills for you. Those payments will be located on your annual escrow report from the lender or on the form 1098. Even travel expenses incurred for property-related purposes may be deductible from rental income.
Professional Services: If you do not manage your rental properties yourself, any fees paid to property management professionals such as my firm, an accountant you may have, or real estate attorneys you retain are deductible. These experts should also be able to help you navigate the complexities of tax on income generated by owning and renting out residential real estate.
Depreciation: Depreciation is a non-cash deduction that allows you to account for the wear and tear of your rental property over time. Even though you are not recording this as an expense that you pay for, the IRS provides for a declaration of depreciation expense to recognize that assets lose their value over time. There are specific guidelines for depreciating different components of your property, such as buildings and appliances or capital improvements made.
Depreciation: A Valuable Benefit to Landlords
Depreciation is a powerful tax-saving tool that deserves special attention. It allows you to allocate a portion of the property’s cost over its useful life, thus reducing your taxable income. To make the most of depreciation, consider the following:
The Modified Accelerated Cost Recovery System (MACRS) is the method used by the IRS to determine depreciation deductions. MACRS tables to calculate depreciation accurately are located online and individual residential properties depreciate at a rate of 3.636% each year for 27.5 years. Note that only buildings and contents are depreciated. You cannot depreciate the land value.
Make sure to maintain good records of the property’s original purchase cost, all acquisition fees and charges paid, improvements over time, and other expenses that can be depreciated. These records may be harder to locate if you have lived in the house as owner occupant for some time. All of this information will be needed to set up your depreciation schedule whether you do it yourself or rely on a tax preparation professional. Lastly, be aware of the “recapture tax.” If you sell a rental property for a profit after having claimed depreciation expenses, you may need to pay “recapture tax” on the accumulated depreciation deductions. Proper planning can help minimize this tax liability.
Tax Preparation Tips for DC Landlords:
If someone else collects your rental income for you, they will deliver to you a form 1099-MISC. The income reported should match the gross income you receive over that tax year, not the net income after expenses. This is a common misunderstanding. All rental related expenses can be deducted from the reported gross income.
If your rental income includes subsidized rental payments from the DC Housing Authority, you will be sent a form 10099-MISC. If your manager also issues a form 1099 on your tax ID, then it needs to be reconciled in your tax return to inform the IRS and to avoid double reporting (and taxation) of rental income.
Every year owners with rental property in the District of Columbia need to file tax returns with the DC Office of Tax and Revenue (OTR). It is important to keep your tax filings current as it can create a roadblock in the future to renew your business license or do other business with the District government if you need a clean hands certificate.
A D-30 form is filed to report rental income, even if you do not earn other income in the District. You must also file a Personal Property Tax return FP-31, even if you have no personal property at the rental. The latter filing can be done online within minutes as a zero dollar return in your MyTaxDC portal. CPM has instructions if you need help.
If you wish to file an extension so that your DC taxes are filed later in the year, use form FR-128 and file it on time. NOTE: If you expect to have tax due for when you file the D-30, you must pay the estimated amount at the time of filing the extension. Failure to do so or failure to pay the right amount, will result in fines and penalties.
Navigating tax season as a property investor or landlord requires careful planning, attention to detail, and a good understanding of the tax code. Deductions, depreciation, and tax-saving strategies are essential tools that can help you maximize your return on investment and minimize your tax liability.
As March arrives and tax filing begins, consider consulting with a tax professional to ensure you are making the most of these opportunities. With the right approach, you can make tax season a financially rewarding time for your real estate investments rather than a burden..
This article was written with publicly available information and is not to be considered as professional tax advice. A taxpayer should always consult a tax professional to determine if the ideas and strategies presented in this article apply to their situation.
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Below is a chart that summarizes some online research and presents a timeline of tax deadlines so that you may better plan your filing preparations.:
Note: Tax deadlines may vary based on individual circumstances, state residency, and tax situations. Always verify deadlines with the relevant tax authorities and consult with a tax professional if needed.
Scott Bloom, Owner and Senior Property Manager, Columbia Property Management
Bloom founded Columbia Property Management in 2012. CPM’s goal is to provide a powerful, personal level of service to our clients. We focus on smaller landlords, professionally managing their assets, so they can succeed by investing in rental real estate.
Scott is an active member in multiple professional organizations including the National Association of Residential Property Managers (NARPM) and serves on the property management committee of Greater Capital Area Association of REALTORS® (GCAAR).
For more information and resources, go to www.ColumbiaPM.com
