Somehow, it’s December already, and rental owners everywhere need to start thinking about tax season. For some, this year’s filing deadline may seem to have come too quickly. That’s because the IRS postponed the 2019 filing deadline until July 15th due to the COVID-19 pandemic. Despite this year’s speedy turnaround, organized rental property owners will have a much easier time filing, especially when it comes to the available 2020 tax deductions.
Calculating Your Rental Income
Before a property owner can claim any 2020 tax deductions, they must first calculate their rental income for the year. According to the Internal Revenue Service (IRS), property owners must include several rental income types in their annual tax returns.
Rental Income Categories
- Rental Income: The IRS defines rental income as “any payment you receive for the use or occupation of property.”
- Advance Rent: You must include advance rental payments — like first and last month deposits — as income for the year you receive them. This is true even if the deposits cover a period in the future.
- Security Deposits: When you use a security deposit as a final rent payment, you must include it as income for the year it’s received. Landlords do not have to include security deposits as income if they plan to return them to their tenant at the end of their lease period. However, suppose the property owner keeps a portion of the deposit because the tenant did not meet their part of the lease agreement. In that case, then the property owner must report the amount kept as income.
- Lease Cancellations Payments: If your tenant pays a fee to cancel their lease, this is considered rental income. As a result, property owners must report this money as income.
- Expenses Paid By Tenant: If your tenant pays any of your expenses and then deducts them from a rental payment, report these payments as rental income.
- Property or Services Received: If you receive property or services rendered in exchange for rent, then you must include the exchanged rent amount in your income.
- Lease with Option to Buy: The IRS also generally considers rental payments you receive under a lease with an option to buy agreement as income.
Document Your Income Carefully
If you are self-managing your property, make sure you maintain documentation for all rental payments. Otherwise, you may have a difficult time verifying your income in the event of an IRS audit. If you work with a property management company that collects rental payments on your behalf, they will typically issue you a 1099-MISC tax form that reports all rental income during a calendar year.
Available 2020 Tax Deductions for Rental Owners
Once you’ve tabulated your annual rental income, it’s time to organize your 2020 tax deductions. Every penny you spend preparing, managing, and maintaining your property can be deducted from your rental income, which reduces your tax liability. So, it’s in a property owner’s best interest to track these expenses carefully.
Rental Property Tax Deductions
- Advertising and marketing a property.
- Cleaning and maintenance.
- Commissions paid for tenant placements.
- Depreciation.
- Homeowner association dues and condo fees.
- Insurance premiums.
- Loan interest expense.
- Local property taxes.
- Property management fees.
- Pest control.
- Professional fees.
- Equipment rental.
- Rents you paid to others.
- Repairs.
- Supplies.
- Trash removal fees.
- Travel expenses.
- Utilities.
- Yard maintenance.
As with rental income payments, it’s crucial to document expenses you plan to deduct. During an audit, the IRS will scrutinize these expenses closely. If the property owner can’t justify their deductions, then the IRS won’t allow the expenditures. The IRS could also force the property owner to pay costly penalties. With this in mind, save all vendor invoices, check stubs, credit card statements, and receipts associated with these expenses. The IRS also recommends maintaining these records for at least three years and as long as seven years under certain conditions.
The Important Difference Between Repairs and Improvements
From an ownership standpoint, there might be very little difference between putting a new roof on a home and modernizing the kitchen. However, to the IRS, these are very different expenses. Repairs keep a property in good operating condition. So, property owners can deduct the cost of painting, appliance repair, or replacing broken windows or doors from their rental income.
By contrast, the IRS classifies expenses that add to the material value of the property as improvements. That means property owners must capitalize and depreciate the cost of upgrading a kitchen, adding a bathroom, and many other activities over several years. Depreciation is a complicated process with significant tax liability implications. That’s why most rental property owners should hire a qualified tax professional to prepare their annual returns.
Great Property Management Companies Can Help You Track 2020 Tax Deductions
If you self-manage your rental property, you’ll have to track your income and deductions on your own. However, excellent property management companies will do much of the organization for you. At Rent Portland Homes by Darla Andrew, we track all monthly rent payments in our online portal. Our clients can log in any time to track rent payments, download tax documents, and calculate their investment returns. We also offer an in-house repair team that can handle many repair and maintenance tasks. We also upload these work orders to our online portal so our property owners can easily track and manage their expenses. When it comes to other repairs and improvements, we can refer our owners to a list of more than one hundred approved vendors.
Tax season can be a stressful time for many rental property owners. That’s another reason why partnering with a property management company can be a tremendous relief for landlords. Our team exists to handle the critical day-to-day details of rental ownership. At the end of the year, our owners collect their tax documents, turn them over to their tax preparer, and then file their returns. Along the way, they know their investment will be protected by one of the most experienced property management teams in town. To learn more, contact Darla directly at (503) 515-3170 or fill out the contact page on our website. April 15th will be here before we know it, so it’s never too early to get organized!