If you are considering purchasing rental property, consulting a tax professional can be just as important as speaking with a real estate agent. Rental property has its own set of rules and guidelines. With proper tax planning, TH Tax Services in Panorama City California can work for your benefit and protect your interests.
When you become a landlord, you will need to start reporting your rental income. The Internal Revenue Service describes rental income as any payment you receive for the use or occupation of property. In addition to normal rent payments, you must report advance rent. You will report the advance rent in the year you receive it, even if the period covered is after or before the period the income is received. Security deposits which are used as a final payment of rent are considered by the IRS to be advance rent. It is to be included as income upon receipt, and then not included for the final month when you utilize it for rent. If the security deposit is to be returned at the end of the lease, you will not claim the deposit,unless part of the deposit is kept, in which case you will report the income for the year that you claimed the portion of the security deposit.
Sometimes, a tenant needs to back out of a lease. Most landlords will charge a cancellation fee for breaking the lease. If you charge a fee for lease cancellation, and a tenant cancels the lease, you will include the amount received for the cancellation fee as rent.
If your tenant pays for your utilities, these payments are considered income. If they are deductible expenses, you can deduct them, but all expenses paid by a tenant must first be reported in income. If you receive property or services in lieu of rent money, the fair market value will be added to the rental income.
After reporting your income, you can begin calculating your expenses. Many of your short‐term expenses are deductible, but there are possible long-term expenses to consider as well. One of the perhaps lesser thought of considerations is the issue of capital gains. If you plan to hang on the rental property for a while, you will most likely see a profit when you decide to sell. Any major improvements on the property will apply toward your cost basis, reducing your profit and the tax you will need to pay on that profit. Therefore, when investing in rental property, you should consider if there is any work that needs to be done. Is the work mostly repairs or improvements? Either way, you should keep all receipts, including work done by an outside contractor. It’s easy to go full steam ahead once you purchase, but repairs can be deducted only when you are renting, which means it has to already have tenant. If possible, improvements should be made before tenants move in, and immediately filed in a long‐term file so that there is a record if you sell the property. Repairs, if they are not essential, should be made after the tenant begins paying rent so that you can claim the rental property repair deduction. Repairs on rental property are fully deductible.
There are many deductions available for rental property. Mortgage interest, as in your main home, is also deductible for rental property on the associated tax form. You can also deduct interest on credit cards which are used for rental purchases. Personal loan interest can be deducted, if you use the amount of the loan to improve or purchase the property. If you take out a loan, but do not use the loan right away, the interest is not deductible until you start using the loan for rental activities. Premiums paid for insurance on rental activity can also be deducted. This includes landlord liability insurance, and coverage for fire, theft, and flood. If your home is destroyed, you can also claim partial deduction on casualty losses.
You can claim depreciation on your property as well. Depreciation is offered by the government when you purchase your property. The Internal Revenue Service allows you to slowly claim a certain percentage of your property over an extended period of time. You are able to deduct the cost of the property in increments each year. How long the depreciation lasts is up to the government, but usually you will not receive the full depreciation for 27 years.
Mileage is another item that you can claim. If you are traveling to and from your rental property for rental activities, you can claim your travel expenses and mileage, as you would if you were self‐employed. If you are traveling overnight for rental reasons, such as out of state property with a complaint, you can deduct your airfare, hotel bills and meals.
