Most landlords realize that tenant screening is only part of the formula for success as a real estate investor. Knowing how to minimize the amount that has to be spent in taxes at the end of the fiscal year while still operating within the tax laws is equally as vital to your success as a landlord. Here is a look at some of the tax breaks that are available to landlords.
COVID-19 Related Tax Breaks for Landlords
Since the economic landscape has changed for everyone with the emergence of the COVID-19 pandemic, the federal government has allowed tax breaks pertaining to the virus. Most notably, the deadline to file Q1 and Q2 estimated tax payments for 2020 was pushed back until mid-July. In another attempt to minimize negative financial ramifications associated with the virus, landlords can also apply their net operating losses from five years ago.
Other COVID-19 related tax breaks include an increase in the amount of loan interest that can be deducted, the ability to claim any AMT tax payments made in 2020, and the ability to write off any improvements made to the subject property over the course of the year.
Standard Tax Deductions for Landlords
Depreciation
Experienced landlords realize that their property's depreciation is one of the largest and most important deductions that can be made every tax season. To maximize the amount of depreciation that can be claimed, landlords should allocate as much of the property's purchase price to the building itself, as land can not depreciate.
Maintenance and Repairs
Depending on the renovation's significance, some improvements to a rental property can be claimed as a tax deduction. Larger projects have to be classified as capital improvements that depreciate over multiple years, thus reducing the current year's deduction. To ensure that your CPA can more easily sort through deductions, landlords are encouraged to sort all of their repairs, renovations, and other projects by vendor so their CPA can streamline the classification process.
Transportation
A great deal of any landlord's time is spent traveling. Not only do they need to make regular trips to the rental property, but there are also trips to the bank, meeting with their broker, trips to the hardware store, and more. Landlords who use an official home office and plan to claim transportation costs on their taxes should have an IRS-compliant mileage log that can track any business-related travel expenses.
1099 Contractors and Employees
Any wages paid to independent contractors and other employees who help with the running of a rental property are fully deductible for the landlord. While regular employees will require a W-2 Form for tax purposes, independent contractors should receive a 1099 Form for their own records and those of the landlord.
Tax Forms for Landlords
Landlords who are filing the income they have earned over the previous year should fill out a Form 1040 and attach a Schedule E: Supplemental Income and Loss form. A schedule E form allows a landlord to file their financial income and losses for up to three properties. In addition to these forms, landlords should also provide a 1099 form to any tenant who pays them more than $600 in rent over the course of the year.
While being a landlord provides the opportunity to make a steady income, there are many responsibilities associated with the position. In addition to regular tenant screening, landlords also need to be aware of the tax ramifications of what they're doing to ensure they maximize their savings while operating within the law.