As inevitably as the sun rises and sets every day, tax season comes around every year. Whether or not you’re new to real estate investing in McKinney, you may not know all that you want to know about how renting properties impacts how you handle your taxes.
There are many tax benefits (and responsibilities) that come with real estate investing, and if you aren’t taking advantage of what you are entitled to, then you may be losing money on your properties at the end of the year.
Here are a few things that you should be aware of when it comes time to sit down to get your paperwork in order.
A quick disclaimer: At RentHub, we want to make tax time less stressful for our investors. However, this article should not be construed as tax advice. If you need support in the form of great documentation, reach out to us! As a McKinney property management company, we make accounting and reporting easy.
Start With Rental Income
- As a general rule, you should include any amount of money that you receive as rent in your gross income.
- If you receive payment for the use or occupation of your McKinney properties, you should report that income.
- Be aware of a few other considerations here: different amounts may be considered rental income that you’ll need to report on your tax return.
One example is advance rent, which is any amount that you receive ahead of the period that it covers. If you sign a two-year lease and collect income meant to cover the first and last six months of the lease, then you’ll need to include that entire amount in reported income for the year you collect it.
- Advance rent also covers security deposits that you use as final payment of rent.
- If you plan to return it to a tenant following the lease, then there is no need to report it as income.
- If you retain any amount of it for a failure to follow the terms of the lease, then you must report that amount as rental income.
- This rule also applies if a tenant pays you to cancel a lease; the amount paid is considered rent.
Finally, be aware that in any instances where a tenant pays your expenses, you must count that as rental income. This premise can also apply to cases where a tenant pays bills that they usually would not pay under the terms of the lease. You may deduct the expenses if they typically are deductible, but should include the utility bill paid by the tenant as rental income.
What About Deductions?
When you receive income from the rental of a dwelling, then you can deduct certain rental expenses associated with that dwelling on your tax return. This category is pretty broad and includes a wide array of items. Think about everything that you spend money on when renting out your McKinney rental properties:
- Auto and travel expenses
- Cleaning and maintenance
- Insurance fees
- Legal or other professional fees
- Management fees
- Mortgage Interest
- Operating Expenses
- Property Tax
- Utility fees.
Simply put, you can deduct any item that counts as ordinary and necessary expenses for managing or maintaining your rental property. You can also deduct the cost of materials, supplies, and repairs or maintenance that you undertake to keep your property up to par.
As mentioned above, you may also deduct any expenses paid by a tenant if they are deductible rental expenses.
A Couple of Special Considerations
- Depreciation allows you to recover the cost of establishing an income-producing property over time.
- Rather than taking a single significant tax deduction in the year that you buy McKinney rental properties, you would take smaller tax deductions each year for the expected life of your properties.
- You can begin to depreciate rental property when it is ready and available for rent, and this can be a reliable method of spreading your savings over the life of the property.
- You can deduct “ordinary and necessary” expenses for vacant properties the same way that you can for occupied properties.
- You cannot deduct lost rental income; in the same vein, you can’t deduct certain expenses as interest when you pay them to obtain a mortgage. Mortgage commissions, abstract fees, and recording fees count as items that do not qualify.
- Finally, loan origination fees, maximum loan charges, premium charges, or “points” are all forms of pre-paid interest. This fact means that you can’t deduct them in full the year they are paid. Instead, you must deduct them in full over the term of the loan.
How Do I Report Income or Expenses?
- If you rent real estate, you should typically report income or expenses related to the rental on Form 1040, Schedule E, Part I.
- You should list all income, expenses, and depreciation for each property.
- If you have more than three rental properties, attach as many additional Schedule E forms as necessary to list all other properties.
If your rental expenses exceed the income earned on your McKinney rental properties, you may be able to limit your losses. Passive activity loss and at-risk loss rules restrict the amount of loss that you can deduct. You may also be able to limit loss if you have personal use of a dwelling that you rent. The IRS has many resources that can provide you with more information.
A Property Manager Can Help!
All of this may seem overwhelming; if so, you aren’t alone! Tax time is already overwhelming for the majority of Americans who don't own rental properties.
If you’re even remotely concerned about your ability to navigate the complexities of real estate investing and taxes, reaching out to a McKinney property management company could be a huge help! However, not all property managers manage your rentals with the same level of care—and this includes the way they handle documentation.
How can you get through tax season unscathed? More importantly, how can you find a property management company in McKinney who can help your portfolio during tax season? Thankfully, RentHub has the answer!
Download our FREE guide to finding the best property management company in the Dallas area! This handy guide helps investors identify the traits in their potential property management partner that make your pick worthwhile in tax season—and any season!