Do’s and Don’ts for Landlord Taxes

Tax Season Do’s and Don'ts for Small Property Owners

By Holly Johnson  
Do’s and Don’ts for Landlord Taxes

With so many forms and papers to understand, tax season can feel like a scary time for small property owners. Here, two CPAs explain some basic dos and don’ts to ease the burden.

Tax season can often feel like a huge weight on the shoulders of a small property owner. Paperwork to complete, laws to understand, receipts to collect—Tax Day is never a happy one for landlords. Thankfully, there are a few tricks that can help make the day less doom and gloom.

Here are some fast tips from certified public accountants (CPAs) Philip Taylor and Amanda Han:

Tax Time Do's

  • DO Make sure to capture all expenses. “Bookkeeping is almost a dirty word, but if a landlord really wants to minimize their exposure to taxes, it starts with good record keeping," says Han. The Internal Revenue Service highlights the most common deductions landlords shouldn't miss come tax time.
     
  • DO Prepare paperwork ahead of time. "Gather all expense information, including mileage to and from the property, meals and home office details," Taylor advises. Having this information on hand will save time and stress.
     
  • DO Know the rules. Due to the complex nature of the U.S. tax code, learning about tax rules that affect rentals and real estate is a smart move for landlords. It's especially important, Taylor says, to get familiar with the Schedule E form as this calculates rental income or loss. For the most up-to-date information on tax rules for landlords, refer to Publication 527 from the IRS (and each of its handbooks).
     
  • DO Make sure all supplemental tax documents are correct. “When it comes to 1099s from management companies or 1098s from lenders, their numbers aren't always correct," says Han. Keep track of all transactions with management companies and contractors in real-time throughout the year to avoid a mistake. If any documents have inaccuracies, be sure to request corrected copies.
     
  • DO Check in with a CPA. According to Han, landlords should check in with a CPA several times per year—not just at tax time. The tips CPAs offer can help save money all year long, but only if they have insight into the landlord's long-term plans.

Tax Time Don'ts

  • DON'T Classify rental repairs as improvements. “Repairs can be deducted immediately, while improvements need to be accounted for with depreciation," says Taylor. Making this mistake can cost money or hold up a tax return with the IRS.
     
  • DON'T Forget to account for any non-deductible prior year losses. “Landlords may be able to deduct [prior losses] this year based on income," notes Taylor. Landlords who are unsure about the process should consult a CPA.
     
  • DON'T Rush. "When we rush, we forget expenses and make mistakes," says Han. Sadly, those mistakes can lead to real financial penalties—there are no penalties for requesting more time.
     
  • DON'T Be too conservative or aggressive with deductions. Many landlords aren't familiar with the rules that dictate which deductions are fair to take, so it can be hard to know where to draw the line. “Be honest," says Han. Landlords who take the deductions they deserve don't have to fear an audit.

 

When it comes to coping with taxes as a landlord or real estate investor, both experts note that familiarity with tax laws is essential to lowering tax bills.

The best advice for landlords during tax season? "Don't wait," says Han. "Stop what you're doing and get started."

Author_Holly_Johnson
About the Author:
Holly Johnson
Holly Johnson is a financial expert and award-winning writer who is obsessed with frugality, budgeting, and travel. In addition to serving as contributing editor for The Simple Dollar, Holly writes for well-known publications such as U.S. News and World Report Travel, Personal Capital, Lending Tree and Frugal Travel Guy.