Tax Tips & Strategies for Rental Properties
When it comes to owning a rental property, it is crucial that you hire a professional to ensure you don’t miss out on important tax benefits, deductions, and exemptions.
1. Income Splitting
If your spouse, family, friends, or associates are active in the rental property, you may be eligible to treat the rental property as a partnership, rather than a sole proprietorship. At a certain level, income divided rather than paid as wages is tax beneficial, provided all have been active in different ways; they do not have to be on the front line of the rental property. One way to test is to ask the question: “If this person was not here, would I have paid someone else?”
2. Finder’s Fees
Has someone found tenants or a buyer for your property? Consider paying them a finder’s fee. This is a method of advertising. You can even compensate someone who is actively trying to recruit renters or buyers within reason, even if the deal didn’t work out.
3. Advertising
Advertising comes in many different forms, including newspapers, flyers, brochures, business cards, fridge magnets, signs, coupons, literature books, calendars, bookmarks etc. These are all deductible. You can make them yourself or have them designed professionally.
4. Using Borrowed Money
Most rental properties have a mortgage and the interest is deductible. Some taxpayers may wish to use a line of credit or other means of financing for repairs and other expenses. Provided your finances are in order and you can afford to meet our obligations. All interest and finance charges incurred on your rental property are tax deductible. This is especially handy for expansions and using leverage.
5. Legal & Professional Fees
Consider hiring a Lawyer to draw up your leases and do the majority of the legal work. Having a Bookkeeper come in quarterly to ensure your reporting is in order is also wise. The fees charged outweigh the burden you may feel, should you run into any problems. Lawyers can also advise you on buying and selling and handling changes in your portfolio.
6. Hire Experts for Difficulties & Repetitive Tasks
It is important that your rental property is well-run and that you get the right people to help you out. Hiring an expert is not only an effective tax strategy (because the costs are deductible) but it’s also an excellent time management method. First meetings are generally free, and if you have all the relevant information, the experts can generally tell you what they can do for you and what it will cost. As a general rule of thumb, if you don’t want/need to do a task or you don’t know how, reach out for help. If you are serious about expanding your real estate portfolio, you may want to consider a Real Estate Consultant or Coach.
7. Leasing Vs. Purchasing
In most cases, you can deduct the non-personal portion of the lease, whereas you can only claim a portion of purchases. Some items you may consider leasing include vehicles, equipment, furniture, appliances, computers, and electronics. For example, compare purchasing $10,000 in appliances to leasing the appliances for 2 years at 10 percent. On the lease, you would make $12,100 in lease payments and it would be entirely deductible, compared to the $3,200 deduction you would get in year 1 if you purchased (depreciation). As a bonus with leases, you usually have the option to purchase at the end of the lease for personal use at a reduced rate.
8. Property Management
If your schedule demands your time away from your rental property, or you feel management is not for you, you can hire a property management company to do all the leg work. These fees are all deductible. Faithe Rouse Professional Accounting Services specializes in accounting for property management firms. We have certified professionals for all real estate-specific accounting needs.
9. Maintenance & Repairs
Your rental property will need general upkeep and may need major renovations. These may be treated differently when it comes to taxes. General upkeep, minor repairs, and replacement of failed equipment are usually 100 percent deductible in the year they were done. However, major renovations that substantially improve the property are considered capital in nature and depreciate over time, rather than being fully deductible in the year. You should carefully consider scenarios before spending a sizeable amount of money. Hire a reliable contractor who does quality work and is in nosiness for the long run. Poor quality work could end up costing you more and jeopardize your tenants.
Get the most out of your rental property by hiring Faithe Rouse Professional Accounting Services. Our experienced and knowledgeable team is here to provide professional guidance, advice, and help you reap the benefits. Book an appointment with one of our income tax experts or visit our services page to learn more.
