Owning property for rental income can be a great way to grow your wealth.
However, it also comes with a lot of responsibilities, including keeping good records, hiring superintendents, and doing your taxes. Consistent record-keeping may seem like a hassle, but it will help you stay on top of things and will ensure that your CPA has everything they need when filing your tax returns.
Rental property owners are required to report their income and expenses on Form 1040, Schedule E. Most investors use cash basis accounting, which means that rental income is recorded when received and rental expenses are deducted as they are paid. Many rental property financial software solutions, such as Stessa, include a chart of accounts modeled after Schedule E to make it easier to track rental income and expenses throughout the year. Read more https://www.sotahomebuyers.com/sell-my-house-fast-eagan-mn/
If you receive rental income before the period it covers, such as a security deposit, then that is considered advance rent and should be reported in the year that you received it. However, if you are going to use the security deposit towards the final month’s rent, then that is a month in which the landlord should not be reporting it as income because it has already been used.
You may also need to report other types of income, such as lease cancellation fees and money that you receive for services that you provide, such as fixing the property or cleaning up after a tenant leaves. In addition, if your renters pay for any expenses related to the rental property, such as utilities or maintenance costs, then that income is taxable as well.
Another important factor to keep in mind is that rental property expenses are tax deductible, but only up to the amount of rental income you received during the year. Expenses that are not related to the rental income, such as mortgage interest payments and capital improvements, do not count toward your deduction limit.
If you own multiple rental properties, you must separate the income and expenses for each one by using different Schedules E. You should fill in lines 1 and 2 for each property on its own schedule, and then combine the totals from all the schedules to report your total rental income on your federal return.
Using good rental property tax reporting practices is essential, especially if you plan to sell your rental property. The IRS will want to know how much you made in profit for the year, so it is important that you record all the income and expenses accurately. A tax preparer who specializes in rental properties can also be helpful with this process.
If you have questions about your property rental income tax reporting, contact a certified public accountant (CPA). A CPA can assist with all aspects of real estate investing, from preparing tax returns to buying and selling property. They can also provide advice on tax breaks, such as depreciation. Depreciation can lower your taxable income, but it is important to understand that you will have to pay tax on this when you sell the property.
