If you're buying an investment property to use as a rental, you're entering an exciting new world of generating income as a landlord. And, while there are a lot of things to learn in order to be successful, one of the most financially valuable is how to properly file taxes to keep your rental profit's tax bill low. Here are 4 tips from the pros that anyone can use.
Track Mileage. Travel while doing things related to the rental is one of the most missed business expenses among landlords. And, it can really add up if you do most of the work yourself. You may want to do use a mobile app designed for tracking business trips, or you can use a simple mileage log book available at most office supply stores. Either way, be sure to be diligent about tracking trips... not only to and from the rentals, but also when doing things like buying supplies, meeting with tenants or vendors, going to the bank, and dealing with licensing or permit requirements.
Keep Receipts. Start a good recordkeeping system even before the purchase is complete and stick to it. Keeping track of expenses in ledger books, keeping receipts in a file, and/or using small business accounting software will all help you claim all available business expenses when it comes time to file taxes. Even if you're not sure if the expense will be deductible, keep it and discuss it with your accountant or tax preparer in the spring.
Track Business Use. If the rental is only a portion of your overall property (such as a vacation home you also use or a room in your home), be sure to understand how the personal use affects your business expenses. For example, if you only rent out the property for 14 days or less each year, the income does not need reported to the IRS and is tax free. On the other hand, such a dual use property may mean that not all of the expenses are fully deductible -- leading to a higher profit when you file taxes.
Get Help. Completing the Schedule E forms and filing your taxes when you have rental income may not be something you should do alone... at least at first. Failure to understand the passive income rules and how to properly apply them to your taxes may result in overpaying income tax (such as with missed deductions) or missing important filing requirements. Developing a relationship with an accountant is also a good way to be able to plan for the future of your landlord business and learn other ways to streamline your business and increase your total profit.
Following these few tips when setting up your new landlord business is sure to result in lower taxes, increased confidence, and a better profit margin in the long run. And then, you can start planning how to enjoy your future income stream for years to come. For more information, contact companies like Alexander & Associates CPA.