Investing in rental properties near Washington D.C. allows for tax advantages that other investments don’t. One such benefit that landlords can take advantage of when income taxes come due is the ability to deduct expenses related to your rental property and rental income.
As a real estate investor who rents property to others, a landlord must report all collected rental income to the IRS as taxable income. The IRS offers several tax tips for landlords reporting rental income, as well as a list of acceptable tax deductions that rental property owners can use to lower their tax burden.
What Is Considered Rental Income?
All income you receive as rent from those who occupy your properties as their residence is considered rental income. When reporting your taxes, you must claim all rental income you collect as rent from your properties.
Some examples of rental income include:
- Security Deposits. You do not need to claim security deposits on your tax return when you first receive them from your tenants. However, if you keep any portion of the security deposit during the year according to the terms of the lease, you must claim the full amount of the deposit that you kept as part of your reported rental income that year.
- Receiving Services (as opposed to money) for Rent. If a renter exchanges services to you in lieu of paying rent for any period, you must claim the fair market value of the services they provide as rental income. For instance, if a tenant offers cleaning and maintenance services to your rental properties in place of paying their rent for a month, you would claim the equivalent of that month’s rent as rental income on your taxes.
- Fees Collected from Tenants. Most landlords charge certain miscellaneous fees for things such as pets, breaking a lease early, parking, and late rent payments. If you have collected any of these fees, you must include them in your yearly rental income on your taxes.
- Advanced Rent. Any rent that a tenant pays you in advance during a tax year must be claimed in that year’s rental income, even if this advanced rent payment is meant to cover rent in the following year. A common example of this is landlords receiving “first and last month’s rent” at the start of a lease. Even if the last month’s rent covers a month in the following year, you must claim it as rental income during the year in which it is paid to you.
What Can Prince George’s County Landlords Deduct on Their Taxes?
The best way to maximize your tax deductions on rental income is to keep thorough records of all your expenses. According to the IRS, the following tax deductions are available to landlords at tax time:
- Operating Expenses. All office supplies you purchase for managing your rental properties are tax-deductible. Keep receipts and records for anything you are buying for the office, such as management books, paper, ink, pens, legal forms, and office tools and equipment. In addition, subscription-based services like web-based property management software and office phone bills are tax-deductible. If you work from home and have a dedicated home office space in which you perform your rental business operations, you may also claim a home office deduction.
- Maintenance and Repairs. Expenses incurred performing routine and preventive services to maintain the condition of your rental properties are tax-deductible. Routine repairs that you perform in managing your rental properties are also deductible. The IRS does consider repairs to be different from property improvements, and they must be deducted in the year they occurred.
- Travel Costs. If you must travel a long distance to operate your rental property business, be sure to keep receipts and documentation of your airfare, hotel, meals, transportation, and other related expenses, as they usually qualify as deductions.
- Taxes. If your rental property is mortgage-free, you can typically deduct property taxes, state, county, and city taxes, personal property tax related to the business, as well as permit and inspection fees, and business-related wage taxes.
- Utilities. If you pay for utilities such as electricity, gas, water and sewer, trash, and recycling at any of your rental properties, you can deduct these payments from your taxable rental income.
- Legal and Professional Fees. Fees paid to accountants, property management companies, attorneys, business managers, and other hired professionals qualify as tax deductions.
- Insurance. Most insurance premiums related to rental properties are deductible.
- Interest. If you have borrowed money for business or investment activity, such as being a landlord, the interest you have paid on that loan is deductible.
- Depreciation. Landlords can deduct a portion of the value of rental properties over several years for depreciation. Money spent on property improvements depreciates as well.
How Do I Report Rental Income for my Prince George’s County Rental Property?
In most cases, you report income generated from rental properties on Form 1040, Schedule E, Part 1. Your income, expenses, and depreciation will all be figured into the appropriate line on this form. To figure out depreciation, see instructions for Form 4562. Schedule E can be used as many times as needed to claim all your rental properties, however, only fill in the “Totals” column on one Schedule E.
If you have rental expenses greater than your rental income, you may need to use Form 8582 and Form 6198 to determine whether your loss is limited by passive activity loss rules and at-risk rules. In addition, if you use any part of a dwelling unit that you rent for personal reasons, see Publication 527 to determine whether your rental expenses and loss are limited.
What Records Should a Prince George’s County Landlord Keep Throughout the Year?
Maintaining accurate records of all rental activities, including income and expenses, will help you immensely in preparing your tax returns and supporting items. If you are audited, you will need to document all of this information. If you cannot provide documentation, you could face additional taxes and penalties. For travel expense deductions, you must follow the rules in Chapter 5 of Publication 463. The better records you keep in monitoring your real estate activity and expenses, the more prepared you will be to prepare your tax returns.
There are myriad tax benefits available if you own Prince George’s County rental properties. Be sure to use them all to your advantage and maximize your investment. From all of us here at Bay Management Group, best wishes to you for a successful and prosperous 2020!