If you’re a new landlord, you might feel overwhelmed at the idea of filing your taxes this year. It’s no longer as simple as just turning in a W2! An organized system of records and receipts is now going to be your best friend. If looking at a Schedule E form is giving you a headache, a tax professional can walk you through the process. Before you go file though, there’s a few things you need to know…
- What Counts As Income
You probably know to include the rent you receive for the year as income. But have you considered how to treat advance rent and security deposits? An example of advance rent that you need to include would be if a tenant signs a multi-year lease that requires it. So if they pay an installment for 2016 and also their last year, 2018, BOTH count as 2016 income. The consideration for security deposits is that you do not need to count it if you plan on returning it to the tenant.
- Deductions You Can Make
It’s not just repairs and supplies that can count as expenses deductible from your return. Keep great records throughout the year, and you’ll thank yourself. Cleaning, travelling, and even advertising are all fair game if they are “deemed appropriate” as a necessary expense for running your business. However, improvements are not deductible. The full list is available on Form 1040, Schedule E.
- When there’s Depreciation
Depreciation can be a complicated concept. The process begins when the property is officially placed “in service for the production of income”, which means it does not need to have a tenant to begin depreciating. The process ends when the property is either retired from use or you have recovered all the costs associated with it. Landscaping is not usually tied to depreciation, but it might be under certain circumstances
- How You’ve Been Using The Property
If you’re new to property ownership, you might not realize you need to keep track of personal use days. Even if the rental property is in service most of the time, you still have to report any days you used it for something else. If you are in business with a spouse, you will count usage as a qualified joint venture.
- Who Needs a 1099
A good rule of thumb for 1099s is that ANYONE who receives more than $600 dollars in relation to managing the property needs a 1099 MISC Form, postmarked by January 31. For you as a property owner, this means you’ll probably be providing this form to people who maintain the upkeep of your property – any repair men, plumbers, carpenters, etc. who aren’t a part of a corporation.
All of the above information is available for review on irs.gov. You can also download the necessary forms and even speak to an interactive tax assistant within the website! But don’t be afraid to reach out to a professional. Over time you’ll find a record keeping schedule that works for you, and tax season will feel less like fighting through a mound of papers and more like a simple check of a box.