Managing Your Real Estate Tax Accounting

1-800Accountant's full-service financial accounting solutions for rental and real estate businesses can calculate rental income on your behalf. However, if you're handling these calculations yourself, here's what to do. To calculate tax on your rental income, add up all the rent that you’ve received, plus any property-related costs, and subtract the expenses from your gross income.

While owning and maintaining a rental property presents challenges, it also offers numerous tax benefits, including tax deductions related to rentals. Tax deductions reduce your business's tax liability by lowering your total taxable income. Selecting eligible deductions can be difficult without experts on your side. A real estate CPA or real estate tax accounting firm can identify business-associated expenses that can often be deducted from your rental income.

Rental income should be treated like any other form of income when you prepare and file your tax return. If your combined incomes exceed certain income thresholds, you could be bumped to the next tax bracket and be subject to a higher tax rate, which makes strategic long-term tax planning essential to real estate entrepreneurs.

1-800Accountant supports your real estate rental operations with an outsourced suite of affordable, tax-deductible real estate accounting services, including full-service real estate bookkeeping and tax preparation and filing. Our services are customizable and designed to scale as you broaden your portfolio of rental properties in the real estate industry.

It's critical to retain rental property records to aid in tax preparation and support deductions you take to reduce your taxable income. Consider retaining documents related to your financial records, taxes, tenants, maintenance, insurance, and any other documentation and materials that may be helpful. Embrace the use of digital tools to keep your essential real estate documents organized and in a safe, secure, centralized location where they're easily retrievable.

Tracking income and expenses for your rental property is an excellent way to maintain compliance while gaining a better understanding of your real estate investment’s profitability. Depending on the complexity of your business situation, you can track income and expenses via a simple spreadsheet, do-it-yourself accounting software and automation, or you can use a full-service, tax-deductible bookkeeping solution, like bookkeeping services from 1-800Accountant. We offer in-depth property accounting and advisory services that meet your accounting needs and streamline regulatory compliance.

Making your rental property business official with 1-800Accountant is quick, easy, and can save you thousands annually. Our CPAs typically recommend forming an LLC due to its numerous advantages to small business entrepreneurs. LLC owners enjoy simplicity and flexibility in their tax filing, along with the protection of their personal assets, shielding them from business liabilities.

It isn't a requirement to maintain a separate business bank account for your rental property, but it tends to make things much easier for real estate investors. When you separate personal and business bank accounts, you promote efficiency and eliminate potential errors and confusion. If you handle tax preparation for your rental property, you will benefit from the time savings and certainty of having a separate business bank account.

A business expense must be both ordinary and necessary to be deductible. An ordinary expense is common and accepted in your industry. A necessary expense is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary. Consider tax-deductible expenses related to repairs, general maintenance, property taxes, and mortgage interest.

If you meet eligibility requirements, landlords can deduct numerous home office expenses. Common deductible expenses for landlords include rent or mortgage interest, property taxes, homeowners insurance, repairs, ongoing maintenance, heat, electricity, and other utilities, as long as they are associated with your rental business.

Landlords who travel to their properties for business-related purposes, such as for ongoing maintenance, property inspections, or meetings with tenants, can deduct these costs. Like with any eligible deduction, retaining supporting materials is an essential practice. Retain mileage logs, receipts, and other pertinent documentation if you intend to deduct business-related travel costs.

Depreciation allows landlords to deduct the costs over a rental property’s life, provided they meet several requirements, including that they own the rental property, it is part of an income-producing activity, they expect the property to last more than a year, the property was not utilized, then disposed of in the same year, and that the rental property has a determinable useful life.

You will likely owe taxes when you sell a rental property. You will owe Capital Gains tax if the rental property you sold is more than its adjusted basis, which is the purchase price and improvement costs minus depreciation. Typically, taxpayers will owe the Capital Gains tax if they make a profit on the sale of certain assets, including stocks, rental properties, and investments. The actual rate is dependent on several factors, including holding period and the landlord's income. It’s important for real estate companies to do their due diligence prior to selling a piece of commercial real estate.

Generally, landlords do not pay the 15.3% self-employment tax that funds Social Security and Medicare on their rental income. This is due to rent being considered a form of passive income. There are exceptions to this rule, so it's important to understand your tax obligations. If you are responsible for paying the self-employment tax, you can typically deduct half of your contributions.

Landlords may be required to submit several forms to fully report their rental income to the IRS and other relevant authorities. However, the primary forms you'll use include IRS Form 1040, U.S. Individual Income Tax Return, and Schedule E (Form 1040), Supplemental Income and Loss. Check with local authorities or speak with a qualified accountant or tax professional to determine your rental income reporting obligations.

When you trust 1-800Accountant with your rental business's sensitive financial work, your team works to maximize your tax savings while ensuring compliance. If you use workers who are not classified as W-2 employees, such as property contractors or those who engage in property management, it is your responsibility to submit Form 1099-NEC, Nonemployee Compensation, to your workers and the IRS by the end of January following the tax year. 1-800Accountant can handle this process on your behalf.

A 1031 exchange is a transaction in which a landlord trades a qualifying real estate property for another. A valid 1031 exchange allows them to defer capital gains tax on the transaction. The Internal Revenue Code Section 1031 rules benefit taxpayers who invest in real estate. The gain – and the tax on the gain – gets put off until the taxpayer sells the property in a non-like-kind (taxable) transaction. The taxable property sale could happen many years later. The 1031 exchange process involves several steps, including selling the original property, identifying potential replacement properties, and purchasing a qualifying replacement property.