We all have to pay taxes. Death and Taxes right? But there are deductions you can claim for and these are not loopholes but deductions you are entitled to as a landlord. Whilst it is difficult for you to know and understand the finer points of your states tax laws it is important that you have a basic understanding of any deductibles you wish to claim for.
Seek out a skilled tax advisor and you will make your money back no problem. In this article we will look at how to find a good tax advisor, plus what they can help you with and will also cover the most basic deductions that you should be hoping to claim.
At this stage, I must point out that I am not a tax advisor and this article is in no way intended as a substitute for seeking qualified advice. Speak to the right people and you will see that a whole world of tax options opens up to you.
Getting a Good Tax Advisor
A good tax advisor can potentially save you vast sums of money and make your rental business significantly more profitable. But how do you go about finding someone you can trust?
Of course no modern day research would be complete without a scroll through the hundreds of pages turned up by even the most basic of internet searches. Spending even a short amount of time on the internet will bring you a number of names or companies to look at.
The negatives of search engines are that you do not have any first hand knowledge of the companies you are considering. Find a company big enough with a large number of reviews and this issue can be negated. Discuss what you are looking for with a few companies and make your decision from there.
Word of Mouth
You may have a friend or family member that can recommend someone to you. This is always great as you can get first hand knowledge of the company from someone that you know and trust. This of course differs from online searches that can be anonymous; you can never really be sure of the legitimacy of online reviews.
Speak with people you know, especially those that also run rental businesses and see if you can meet with their advisors. This is a great way to find a tax advisor.
Invariably your broker will have somebody they can recommend. This makes life easy as it saves you the hassle of having to source an advisor and it helps for a smooth process in the future as it is likely that your broker and advisor will already have a working relationship meaning that the transfer of information will be simple.
The negatives of course are the motivation for your broker. Is the advisor really that good or do they simply offer the best commission that your broker has come across. Try to understand from your broker why they are recommending this specific advisor and see if they have any personal stories of dealing with the advisor they are recommending.
Common Tax Deductions
In this section we are going to briefly cover some of the more common deductions that you should be on the lookout for. Providing the tax laws in your state allow for them these are the minimum I would be looking for my advisor to be assisting me with.
It is important to remember that you must keep thorough records of everything you are trying to claim. My advice would always be to be honest and not try to play the system and claim more than you are due.
Auditors are very hot on false claims which can be easily spotted due to lacking invoices and records of expenses. It is also a big no-no to try and overstate the value of your expenses as this will be flagged by any sensible auditor quickly. Put simply if you are trying to claim $1000 for new door keys you are going to bring attention to your file quickly.
All things considered it is likely that you mortgage interest will be your single largest claim every year. Keep thorough records and have your tax advisor make a point of ensuring your mortgage is up to date and simple to review to make the claims process smoother.
You should look to keep a track of your spending on repairs and each property you own must have it’s own emergency repair float. This helps you manager each asset individually, meaning that properties are not borrowing from others to remedy problems. It also means that tax filing is simpler as you can show what was paid for by your emergency float.
Repairs are classed as anything that maintains the value of your asset. It wouldn’t be something such as replacing a bathroom. This would be viewed as an improvement. A repair would be more along the lines of repainting a scratched wall or replacing a cracked toilet.
Depreciation of Assets
Depreciated assets need to be spread out across a number of years and your advisor will be able to help you understand what can and can’t be claimed against. This is mainly to avoid people playing the system and spending and claiming back on properties only to sell them at profit the following tax year.
You can claim depreciation of assets for the value of your property; however the land the property sits on is exempt for this. Plus the value of any improvements you carry out and the depreciation costs of any business equipment you have purchased; computers, phones, etc.
Any business insurance policy you take out is tax-deductible and your advisor should be up to speed with helping you claim this back. You will need to keep track of your business policies and will often be asked why you considered this a necessary purchase.
Landlords that take out policies to cover rent and legal costs where tenants have failed references is an obvious example of a necessity investment in insuring your business.
Not to be confused with repairs, maintenance relates to the general upkeep of your property. Do you hire gardeners or pool cleaning companies? Perhaps you have a contract with a pest control firm. These are all things that are not considered repairs and are simply described as additional costs that your property incurs.
Keep records of all of your maintenance contracts and when they have worked and the cost. This will help your advisor put together a thorough record of the cost of maintaining your asset.
In a way management fees could be considered a maintenance cost, but for tax purposes they are considered separate. If you are a landlord that has a separate day job and a busy home life running your rental business may be too time consuming. As such my advice would always be to employ a property manager who can run the day to day business of your property.
They can deal with tenants and handle any issues in terms of maintenance, etc. You will have to pay a fee for this service; more than likely a percentage of the rent or a flat upfront service charge. The fees for this are deductible. As are any fees you have to pay for onsite building managers, association fees or special assessments. As with everything, keep thorough records and use these costings to claim your deductibles.
Should your rental contract be inclusive of any utilities such as gas, water or electricity your state may allow you to deduct these costs. You will of course need to show bills and costings to prove that you have incurred these costs. However utilities companies can supply you with statements relatively quickly to assist you with any claims.
From time to time it is likely that you will incur legal costs. It may be something as simple as having an attorney look over any proposed contracts or it could be a larger filing such as eviction proceedings.
Legal costs also allow you to deduct the expenses incurred for hiring any professionals in what may be viewed as an advisory position. This could be your accountant or tax advisor. This makes hiring professionals a vastly more interesting and beneficial expense as the cost of seeking professional advice can be deducted.
Operating costs are those costs that you incur in the day to day running of your rental business. You may be able to deduct the costs of phone bills, stationery, printer ink, etc.
You can also claim for any office space used. Some landlords will lease commercial space and use this to work from, however most landlords will work from home when necessary. Technically you are able to claim the cost of any home office, however you may find costings very hard to prove for such a claim.
Speak with your advisor to see if this is something that is possible for you and how you would go about proving the value of your time and the cost of the space used as your office.
Tax deductions are a very complex thing to have to handle yourself and whilst a little knowledge is important, hiring a professional is generally considered the best course of action.
This is especially true seeing as you can deduct the cost of employing such an individual. Be smart and deduct what you can legally. Try to avoid any problems by being honest and thorough in your record keeping.
Landlords that try to play the system and over claim are often given short shrift by auditors and that is simply something you do not want on your record. The tax rules are there to be followed and do offer some very attractive options to landlords looking to deduct expenses. Claim your deductions wisely and you will see the profitability of your asset increase accordingly.