If you own rental properties in Baltimore, it’s essential to understand how real estate taxes work. Additionally, knowing what steps to take to ensure a smooth filing process for your rental business is important. Today, we’ll go over the importance of understanding how taxes work, the steps to file rental property taxes, and standard deductions for investors. Read along to learn more!
Contents of This Article:
- Understanding Rental Property Taxes
- Steps to File Rental Property Taxes
- Standard Deductions for Rental Property Taxes
- Track Your Finances With Property Management
Understanding Rental Property Taxes
Owning and managing a rental property is running a business. After all, you have revenue through rental income and expenses through taxes, repair costs, property management fees, and more. That said, whether you make a penny or a million dollars, the IRS wants a piece of it. So, you must report any earnings from your investment property, whether they’re from the sale of your home or rent collected from tenants.
First, you’ll want to look at the profits you make from your property. Unfortunately, all the rent you collect on a rental property is taxable. But luckily, you’ll likely only be taxed on your profits. That said, you can calculate your profits by subtracting your expenses from your revenue.
Keeping track of how much you spend on home upkeep throughout the year can drastically change your tax bill. However, filing taxes can be a complicated process, which is why many investors can benefit from hiring a tax professional to help navigate the essential steps. Additionally, if you hire Northern Virginia property management, they can help you keep track of your income and expenses.
When Do You Owe Taxes on Rental Income?
Typically, you must report all income on your tax return for the year you actually receive it. However, it can get confusing. Here are some instances to keep in mind for filing rental property taxes.
- You must report rental income when you receive payment, whether in the form of cash, check, or electronic transfer.
- If you keep some or all of a tenant’s security deposit, it’s considered income. If you receive a deposit for the first and last month’s rent, it’s taxed as income in the year you receive it.
- Any rent payments you receive count as rental income. That said, if you receive rent for January 2024 in December 2023, you’ll report it on your 2023 tax return.
- If a tenant provides goods or services in exchange for rent, the fair market value of those goods or services is considered rental income and must be reported.
Steps to File Rental Property Taxes
Tax time is coming up quickly, and it’s important to know exactly what you need to do to ensure a smooth filing process. Here are some of the essential steps to consider while filing your rental property taxes for this year.
- Gather Necessary Documents
- Determine Rental Income
- Understand Deductions
- Calculate Depreciation
- Report Income and Expenses
- Claim Deductions
- File the Necessary Forms
Gather Necessary Documents
The first step in filing your taxes for the year is gathering all the documents you’ll need. For instance, you’ll want to get ahold of your rental income records, expense receipts, mortgage interest statements, property tax information, depreciation records, and records or any other income related to the property. These records will help you fill out the necessary tax forms for your situation.
Determine Rental Income
Next, you’ll want to calculate your total rental income, including rent payments, security deposits, and any other payments from tenants.
Understand Deductions
Part of being a successful real estate investor is knowing what tax deductions are available to you. Most commonly, rental property owners can deduct mortgage interest, depreciation, and rental insurance. However, there are several more write-offs to take advantage of. We’ll go over some more of those later in this article.
Calculate Depreciation
One important step in filing rental property taxes is determining the depreciation of your rental. You’ll need to use Form 4562 to report depreciation on your rental property. Depreciation is a tax deduction that allows property owners to recover the cost of wear and tear, aging, and outdating.
Report Income and Expenses
Next, you’ll want to use a Schedule E Form to report your rental income and expenses, including the calculated depreciation in your expenses.
Claim Deductions
Deduct eligible expenses from your rental income to determine your net rental income. This is the amount that will be taxed.
File the Necessary Forms
Once you have all the information you need, it’s time to file. You’ll want to file your federal tax return (Form 1040) and include any additional schedules or forms related to rental income, like Schedule E or Form 4561 for depreciation.
Standard Deductions for Rental Property Taxes
Owning rental properties comes with several benefits–including tax write-offs. There are several deductions that investors can take advantage of. However, it’s important to know what they are. Here are some deductions to keep in mind while filing your taxes for this year.
- Mortgage Interest
- Depreciation
- Rental Insurance
- Professional or Legal Services
- Home Repairs
- Paying Employees or Contractors
- Use of Personal Property
- Landlord-Paid Utilities
- Property Management Fees
- Subscriptions or Memberships
- Home Office Usage
The most significant tax write-offs for investors include mortgage interest, depreciation, and rental insurance. However, the benefits don’t stop there. For instance, if you hire employees or property management services to help run your business, you may be able to deduct those administrative or employee expenses.
Additionally, if you provide your personal property, like furniture, appliances, or yard maintenance equipment in your rental properties, you may be able to deduct those expenses within the given tax year as well. Ultimately, working with a tax professional is best to ensure you get the most from your taxes this year.
Track Your Finances With Property Management
Knowing the ins and outs of rental property taxes is crucial for investment property owners. However, it can quickly become confusing, especially if you’re not a tax expert. Gathering the right documents, reporting the right numbers, and knowing what deductions to take advantage of can be time-consuming work.
If you work with a professional property management company like Bay Property Management Group, tracking your income and expenses can be a breeze. We’ll send you statements showing your rental income and expenses at the end of each month for each property you own. That way, you can keep all your records straight for when tax time rolls around.
Need More Advice? contact us today!
In addition to helping keep track of income and expenses, our team of professionals can help with any part of the rental process, from marketing to tenant screening, maintenance, and more. So, contact BMG today if you need rental management in Baltimore, Philadelphia, Northern Virginia, or Washington, DC.
