Renting out your residential or commercial property is, without a doubt, a solid investment. But you must follow the tax rules to claim expenses and income properly. Organizing and tracking rental receipts is not enough to manage the tax side of a rental property. Whether you’re a seasoned landlord or a first-time investor, meeting requirements when you file taxes as a property owner is essential.
Here we listed four smart tips for landlords from property management experts to help you make the most of your income.
4 Tax Saving Tips for Landlords
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1. Invest in Your Property Business
If it seems like a good year, it is perhaps the right time to invest in the business to have a long-term financial benefit. This can be anything from acquiring new properties, renovating them to flip or improve their market value.
You must convert your ordinary or taxable income into assets. According to property management experts, converting taxable income into assets is a great way to generate future income. The income may not be taxable currently or will produce tax deductions in the future against your income if you depreciate it over time.
Wondering how does it work?
Suppose you have earned $20,000 from your property business this year. You pay 25 percent of income tax on this earning that leaves you with only $15,000 profit. If you’re not living on that cash, convert this amount into an asset worth $20,000. Presumably, these assets generate more earnings in the future.
2. Claim a Home Office
Keep that in mind, a rental income is a regular business that requires a proper office setup. You need to record your expenses and income somewhere, and that can be a room or a desk in an office or home. If you have a dedicated space in your home for all your property business tasks, IRS allows you to claim a house expenses portion as a deduction against rental revenues.
You can base this portion on either the number of rooms dedicated to the activities vs. total rooms in the house or the office’s square footage divided by your house’s total square footage. It is best to estimate it using both ways and then choose the one that offers you a larger deduction.
Beginning with tax returns in 2013, the IRS introduced a simplified way to claim the deduction. This method typically works with a set rate multiplied by the square footage you use in the home. The set rate is around $5/ sq ft for the current year with a maximum of 400 sq ft. But you must dedicate this space to the business tasks as mentioned above.
3. Use Sec 179 Deduction Smartly
Section 179 of IRS allows business owners to put fixed equipment, assets, and machines into service during the current year. This way, the IRS can fully deduct the cost in the current year instead of slowly deducting it. It benefits businesses in managing the cash flow and keeping more money in business owners’ hands over time.
It doesn’t end here, sec 179 further provides huge tax savings as it enables you to potentially qualify for accelerated depreciation and full first-year tax deduction with your depreciable assets. For 2020, the sec 179 deduction is around $51,000. This amount subjects to a phase-out threshold of up to $2,030,000.
Remember that IRS doesn’t allow you to use sec 179 deductions for rental properties and their items. However, it is a smart way to maximize tax benefits on the items and products landlords or owners use regularly. These items can be anything ranging from office furniture, maintenance equipment, software programs, vehicles, telephones, and computers.
You must be running a property investment venture as a proper business to become eligible for sec 179. Seek assistance from an enrolled agent to determine the course of action to qualify.
4. Maximize Benefit on solo 401(k) plan with Rental Income
If your rentals provide you some extra income, setting some cash aside for your retirement is a great idea.
Start a solo 401(k) plan if your business has no full-time employees. Currently, this plan can allow you to have the biggest pre-tax contribution. If you’re not 50 years old yet, you can make $18,000 as an employee of a company. If you’re over 50 years, you can contribute $6,000 (an additional amount) in catch-up contribution.
Furthermore, plans such as simplified employee pension allow you to qualify for tax-deferred contributions up to $54,000 with a 25 percent cap of employee’s compensation. Plus, if you’re interested in setting up your business retirement plan, you can qualify for tax credits up to $500 for three years.
In a nutshell, the given tips are vital as landlords can save big during the tax season. Contact RTI Property Managers for more insight on tax saving and property management services in the best area of Southern California.