Owning a rental property can be stressful, especially during tax time. A rental owner’s countless tasks and responsibilities near tax time can get extremely overwhelming. That said, many rental homeowners prefer to hire a professional accountant rather than file taxes themselves. However, it’s still good for investors to evaluate finances and plan for tax season. Keep reading to learn how to prepare for end-of-year taxes and when to hire an accountant to help.
Tax Planning for Rental Property Owners
Tax season can quickly become a stressful time of year without taking ample time to prepare. After all, planning is one of the most crucial parts of doing taxes each year. That said, it can be easy for busy landlords to fall behind on basic accounting tasks.
However, proper record-keeping is an essential part of a successful rental business. Implementing basic accounting skills early in your rental property career can help you focus primarily on growing your business. Now, let’s go over a few tips for planning out your next tax season.
- Avoid Mixing Personal and Business Finances
- Track All Income and Expenses
- Stay Informed on Tax Requirements
Avoid Mixing Personal and Business Finances
To keep records as accurate as possible, rental owners should avoid mixing personal and business finances. To separate these funds and keep records accurate, open up a business checking account, a savings account, and a line of credit if needed. This makes it so that rental income and expenses will be separate from a rental owner’s personal funds.
Track All Income and Expenses
Part of successful accounting for a rental home includes tracking all income and expenses related to the business. Each property should have a separate account to make it simple to follow the finances for each one.
Thanks to modern technology, if you aren’t sure when to hire an accountant, there is digital accounting software to help track expenses. Let’s take a look at a few options:
- QuickBooks- QuickBooks is very well-known accounting software for small businesses. This software offers full tracking and reporting to help landlords quickly prepare for the dreaded tax season.
- Rental Hero- For rental owners who are looking for something simple to use, Rental Hero is a solid choice. With this software, rental homeowners can track each property separately. Along with that, Rental Hero automatically saves receipts and attaches them to each related expense.
Stay Informed on Tax Requirements
Most landlords are not tax experts and aren’t expected to be. However, rental owners are responsible for staying informed of laws and requirements while filing taxes for the year.
Landlords should know which forms they need and how to fill them out correctly. For example, standard forms for landlords include a W-9 or 1099. That said, rental homeowners may face penalties or even hefty fines if records are not filled out accurately.
6 Ways Rental Homes Owners Can Plan for Tax Season
If you’re unsure if you want to file taxes yourself or when to hire an accountant, it’s best to stay prepared either way. So, let’s discuss some ways rental homeowners can save some stress and plan for tax season efficiently.
- Keep Each Property Separate
- Set Up An Emergency Savings Fund
- Keep Accurate Records
- Prepare a Schedule E
- Try to Maximize Tax Deductions
- Hire Professionals to Help
Keep Each Property Separate
Like how landlords should keep business and personal finances separate, each rental property’s finances should also be individual. Since each property offers a unique set of profits, losses, and funds, it’s much easier to keep track of them separately. Similarly, it makes tax time much easier for property owners.
Set Up An Emergency Savings Fund
As most rental investors know, it’s essential to have an emergency savings fund. When you own rental properties, several scenarios may arise that require spending money unexpectedly. So, landlords can start saving by funneling a small amount of rental income into a savings account each month.
Keep Accurate Records
Landlords these days keep most records digitally instead of having physical invoices or accounting worksheets. Overall, digital receipts and invoices save a ton of time when completing accounting tasks for any business. Likewise, records are accessible from nearly anywhere, at any time, making it convenient for landlords and tenants.
Prepare a Schedule E
Rental properties are reported during tax time on a Schedule E IRS Tax Form, otherwise known as 1040. Landlords should track expenses on their own or by using online accounting software. That said, rental owners should separate income and expenses into some of the following categories:
- Rental Income
- Tenant Refunds
- Travel Expenses
- Maintenance
- Cleaning Costs
- Repairs or Renovations
- Insurance Premiums
- Management Fees
- Mortgage Interest
- Taxes
- Utilities
- HOA Fees
- Marketing Costs
Try to Maximize Tax Deductions
There are a ton of available tax write-offs for rental property owners that can help maximize their ROI. If you are a landlord looking to learn which deductions are available, consult with your accountant or property manager. Some standard tax deductions for rental investors include:
- Repairs and Maintenance
- Depreciation
- Loan Interest
- Travel and Office Costs
- Employees or Contractors
- Legal Services
Hire Professionals to Help
Investors who attempt to file taxes by themselves often find it difficult and time-consuming. As a result, many landlords hire an accountant or a full-service property management team to help keep things organized. While relying on others for tax advice and expertise is an added liability, trusting the professionals can benefit any rental business. Next, let’s determine when to hire an accountant to help with rental property taxes.
When to Hire an Accountant for Your Rental Home Taxes
At some point, landlords may become too busy or too overwhelmed to complete taxes for their rental business fullySo next a result, hiring an accountant is crucial for rental investors who want to remain successful.
How do investors know when to hire an accountant? Here are a few signs it’s time to reach out to the professionals.
- You Own More Than One Property- Once you start owning multiple properties, it’s challenging to track finances for each one by yourself. That said, hiring an accountant to help differentiate income and expenses for each of your rental homes is vital during tax season.
- You Don’t Personally Manage the Property- When you hire an outside source to manage your rental business, it’s hard to decipher what expenses are for what property. Luckily, most rental property management companies have accounting professionals to keep track of your expenses and income for you.
- You Become Overwhelmed- It can be overwhelming for some rental investors during tax time. All forms must be filled out correctly and on time to avoid fees and penalties. In addition, it can take time and patience to track finances for property owners with multiple buildings. If you become overwhelmed, consider hiring an accountant during tax time.
Need Help Tracking Your Rental Property Finances?
Accounting for investment properties is complicated and time-consuming, especially during tax season. In addition, many landlords aren’t tax professionals and may need help keeping track of income and expenses throughout the year. Luckily, tons of great resources are available to help you and your rental business succeed. That said, if you need assistance with your rental properties, the professionals at Bay Property Management Group are qualified to help.
Our comprehensive property management team works to provide real estate investors with complete leasing services, move in and out reports, maintenance assistance, rent collection, eviction services, and more. Contact us today to learn more about how Bay Property Management Group can help your rental business. We offer full-service property management in Washington DC, Baltimore, Philadelphia, Northern Virginia, and all surrounding counties.
