Property owners in Salt Lake have a lot to keep in mind when it comes to managing their rental real estate. They need to be thinking about their rental clients, upkeep of the property, and yes, even taxes. Federal tax responsibilities are something you need to keep top of mind as rental income needs reporting on your tax return. The good thing is that you can also deduct expenses to counter that income. Salt Lake property management companies can help you better manage these administrative tasks.
Getting Line of Sight Into What You Can Deduct
When you receive income for your rental property, you have the ability and right to deduct expenses against that income on your tax return. These expenses vary from factors pertaining to your mortgage of the property, operating expenses, and more.
The first two things you can deduct and need to take into account include mortgage interest and real estate property taxes. When you pay mortgage interest and property taxes, both of these are expenses that you can deduct. A Salt Lake property management company can help you keep track of these records throughout the year so that come tax time, you have the amounts ready to report on your tax return.
There will also be ordinary and necessary expenses that you will deduct as a need to maintain the rental property. These expenses will include maintenance of the property, any utilities that you pay, requirements such as insurance of the property, as well as any advertising to try and garner rental clients. These ordinary and necessary expenses require you to keep good records so that again, come tax time, the information is available.
As you are doing maintenance of your property and general upkeep, the costs of materials to do this are also things you can expense. Think of expenses in this space such as fertilizer to maintain the lawn, flowers, costs of cement should you need to patch cracks in the foundation, etc. These are all materials, to name a few, that will qualify as expenses for your rental property.
If your tenant pays for the expenses, you can still deduct them. For example, if you have a tenant that made a payment to a plumber when they came on-site to repair a pipe, because you could not be there for the on-the-spot payment, that is also something you can expense, assuming you have kept good records. It is all about including the fair market value of those services when you record them.
Ways to Expense the Cost of Improvements
What if you were to do any type of major improvement work to your rental property? These would include things such as the remodeling of a bathroom or kitchen. When you make improvements to a property, all these costs are not something you can expense immediately. Instead, you have to capitalize these improvements, since they add value to the property. Capitalization of these improvements does lead to a tax deduction, but it comes in the form of depreciation.
When you depreciate improvements to a property, you will take the total cost and divide it by the number of useful years. This determination is something your tax professional can work with you on. So if you spend $1,000 on improvements and the determination is that the useful life is five years, you would in theory get a $200 depreciation expense annually on your next five tax returns. There are other special rules with the depreciation that will let you opt to take the entire expense in a single year, but it will be dependent on your tax situation and is best left to discuss with your tax professional.
When You Can Deduct Expenses From income
The timing of when you can deduct expenses from your rental income will be dependent on your decision to be on a cash basis or accrual basis as a taxpayer. If you make the decision to be a cash basis taxpayer, that means that you report all rental income in the year in which you receive the cash. So if someone were to rent your property in December 2020, but not pay you until January 2021, on a cash basis that income is not reportable until the year 2021. Expenses would work the same way, in that you would deduct the expenses when you actually pay for them, versus when you take on the liability to pay them.
The other option is the accrual method of accounting. With the accrual method, you are reporting income when you earn it and the same goes for deduction of expenses. In the same example of a renter in December 2020 who pays in January 2021, with the accrual method you earn the rental income in 2020, thus it is 2020 income. The same goes for expenses where you accrue the liability to pay the expense in 2020, even if you pay it in 2021, and you expense it in the year 2020.
Be Ready and Use a Salt Lake Property Management Professional
It is imperative that you are ready when it comes to tax time so your rental property gets proper treatment. Do your homework and understand what you can expense and what you cannot. Work with a property management company to help you in all these areas to keep good records and maintenance of your property throughout. To learn more, download “The Guide to Finding the Best Salt Lake Property Management Company” today!