Taxes and Your Rental: Here’s What You Need to Know

As we near Tax Day on April 15th, it’s important to understand the ins and outs of the tax system and how it can benefit you as a rental property owner.

Here are some quick tips to get you started:

Keep good records. (We help!)

Knowing how much you make in rental income per year and how much you spend on repairs, property tax, operating expenses, etc. is essential come tax time. It’s easier to keep track of things as they come along throughout the year than to try and gather it all when your accountant asks for it. Papers and receipts get lost; people forget. Try to keep a note in your phone, or snap a picture of a receipt so you have it on file for when you need it.

SMART, of course, will help you track your rental income and the cost of repairs that we contract out for your property. However, it will be up to you to track what you do, such as the property taxes you pay and the work you contract out independently.

Understand Capital Gains Tax

Capital gain is the amount of money you made off the sale of your investment property less the amount that it cost you. For example, if you bought a condo for $50,000 and sold it for $100,000 (all unthinkable here in Las Vegas, but you get the idea) you would have made $50,000 in capital gains.

That’s money that’s going to be taxed like income.

Often, you can mitigate this hit by considering a couple of strategies.

First, offset your gain with a loss. A common way of doing this is selling in the same year that you take a big loss in stock sales. For example, let’s say you lost $35,000 in stock sales this year, you can use that $35,000 lost to offset the $50,000 you gained from selling your condo.

Then you only net $15,000 in capital gains for the year.

You can also consider what’s called a “like-kind” exchange. For example, you sell your condo so you can buy a duplex. You have reinvested your money and therefore it’s not subject to the capital gains tax.

There are two things you need to watch out for when you do this. You need to make sure your new purchase costs the same or more than the investment property you just sold. You also need to make sure that you reinvest quickly.

Depreciation

Your property is a long-term asset or what the IRS calls a “capital asset.” Like all capital assets, the IRS provides a way to deduct a portion of what you paid for that asset over a series of years. This is called depreciation and if you’re not doing it for all your investment properties, you should be.

Depreciation works like this. If you pay $100,000 for a property and the IRS says you can depreciate it over a 10-year period, then you would deduct $10,000 from your taxes every year until the 10 year period is up or you sell the property, whichever comes first.

For rental properties, you may also have the ability to depreciate items such as appliances and new carpet.

The Property Management Deduction

You’re also allowed to deduct the work that contractors (like a property management company) do for you. SMART manages your property. Our work is deductible because we are considered an independent contractor working for you. We are essentially a business expense.

There are some simple things that you’ll need to do to make this a legitimate deduction. First, you’ll need to have us fill out a W-9 which is a form for independent contractors (we have some already filled out that we would be happy to send you). Then you’ll need to file a 1099-MISC with the IRS. Once you’ve done that, you can deduct the fees you pay us for managing your properties.

All four of these are important things for you to consider as you look at your rental property and taxes but don’t take our word as law. Every situation is different and it requires a professional to determine what tax breaks work best for your situation.

We here at SMART are property management professionals. We’re very good at what we do and we have a good idea of what does and does not benefit our clients at tax time. However, we’re not tax professionals. That’s a gig for Certified Public Accountants (CPAs) and if you don’t have one, give our office a call and we may be able to recommend a few.

Give us a call: 702-750-9725

SMART is open Monday-Friday from 9am-5pm.