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Real Estate Tax Mistakes To Avoid STOP Making These Errors In Your Property Taxes Landlord Studio
Mar 16, 2024
If you’re making these property tax mistakes as a landlord, you’re probably missing out on some serious tax savings.
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Tax season can be daunting for landlords but it doesn't have to be. By avoiding
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common mistakes and leveraging quality software you can save both time and
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money at tax time. So let's explore the seven major mistakes to steer clear when
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filing your rental property tax return. Now just to note as a disclaimer none of
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this is tax advice so do seek professional help when you need it and
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for any tax saving strategies. Number one not claiming depreciation. So depreciation is one of the top tax benefits of real estate investing and so
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you'd think that most investors would know it's an absolute must on their tax
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return. Depreciation allows investors to deduct the value of the property over
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what the IRS deems its useful lifetime which is typically 27 and a half years
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for residential rentals and 39 years for commercial property. This deduction accounts for wear and tear and the gradual sort of deterioration of the
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property overall. It's often called a phantom expense because you don't have
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to spend any additional money once you've brought the property and you can
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typically receive this deduction on an annual basis. It can equal actually
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thousands of dollars or even tens of thousands of dollars a year yet despite
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this many investors forget or leave this deduction out on their tax return
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entirely. Depreciation should be claimed on line 18 of the Schedule E tax form. If
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that box is empty you're doing something wrong. Number two not allocating land
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value correctly. Following on from that previous point the next tax mistake
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landlords often make is not correctly allocating the value of their land when
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they claim their depreciation expense. So what do we mean by allocating a value to
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the land? Well when you purchase a rental property you are purchasing the building
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the building's contents and the land that the building sits on. Each of these
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things have a value however when it comes to depreciation only the building
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and the contents itself can actually depreciate in the eyes of the IRS. So
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when it comes to calculating the value of your annual depreciation amount
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incorrectly allocating the value of the land will mean claiming an incorrect
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depreciation amount overall. This could leave you thousands of dollars out of
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pocket or worse open you up to an IRS audit. To get the land value you need to
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pull the property tax card from the tax assessors database and this is relatively
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easy to do just type into Google your country real estate records etc and that
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should take you to the right page that you need. You'll then want to search for
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your rental properties address and pull the property tax card to provide the
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assessed value of the land and improvements. Number three deducting monthly escrow payments. Now when you close on a mortgage your lender may set
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part of your monthly loan payment to be deposited into an escrow account. This
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will be used to cover some of the costs associated with home ownership such as
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real estate taxes, insurance premiums and private mortgage insurance as well. Don't
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make the mistake of deducting the escrow portion the insurance and property taxes
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each month as you as you pay your mortgage bill. Only the mortgage interest
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is deductible the escrow amount itself is not. Number four thinking you need an
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LLC or worse an escort. Whilst there are some pros and setting up an LLC such as
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providing additional protection for rentals it's not necessarily if you want to deduct expenses for instance and in places like California it can actually
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come with significant costs. Whether or not you set up as a business entity for
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your rental properties or your rental management expenses they're still counted as business expenses and are deducted at the end of the year. Don't
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make the mistake of thinking that an entity will make your business any more
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legitimate than it would be otherwise. Congrats you made it halfway through the
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video. Coming up next are the three more really important mistakes that you're
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not gonna want to make as a real estate investor so stick around. Plus I've thrown
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in a little bonus hack at the end of the video that's gonna make a lot easier to
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avoid all these mistakes so stick around for that. But first like the video and
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comment down below what you think of these questions so far or these stats
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and if you have any questions about real estate investing or taxes in general
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drop a comment in the video below. Now number five deducting non allowable
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travel expenses. Travel and mileage can add up to a pretty significant deduction
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but not every travel expense is deductible and travel deductions are one
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of the most closely scrutinized tax deductions by the IRS so you really want
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to get this one right. If you want to claim travel expenses you will need to
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keep a detailed record of all the travel done with software like Landlord Studio
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and this includes mileage, dates, time, the purpose of the travel. It should all
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really just cover everything that needs to be covered from that travel log
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in case of an IRS audit. An example of allowable travel deduction might be
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driving to your rental property or even flying to your rental property for a
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routine inspection if it's out of state. An example of a non allowable
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deduction would be the cost associated with exploration or expansion. These kind
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of speculative travel expenses are not deductible until you actually purchase a
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property within the same geographic area. Now you might think this is unfair but
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if this rule wasn't in place everyone could write off their travel expenses
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for their annual vacations and all those different types of travels that you
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might want to do by claiming that they were just exploring potential investment
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opportunities. The IRS was unsurprisingly pretty quick to close that loophole. Number six, not using a home office. Now a home office offers
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several tax advantages yet not everyone has it set up. First of all it allows you
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to deduct a portion of your home living expenses. Now if the office takes up 10
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of your house you can actually deduct 10% of things like interest, mortgage
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internet, etc. But that's not even the main tax advantage. Without a home office
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your transportation costs to and from your rental properties are not deductible
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The IRS deems these transportation costs as a personal commute but when you add
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in a home office all of a sudden you are transporting from a place of your
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business to a place of your business. Meaning it's a deductible business trip
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Now number seven, not advertising the property for rent the day that you close
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If you don't advertise your property for rent you've failed to place the property
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into service. You might ask what's the big deal? Well before you place the
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property into service any repairs or maintenance that you undertake can't actually be deducted for that tax year. Instead they get added to the property's
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cost basis and will need to be deducted over the useful life of the property
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This means you lose the flexibility of being able to decide which expenses are
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capital expenses and which aren't and they can be deducted in the full in that
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year and seeing as we'd rather get the deduction benefit immediately rather
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than over 27 and a half years this can be a problem as well. If however you
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advertise immediately you won't need to capitalize every single expense that you
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have just the ones that are deemed improvements for the property. Painting
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is a good example this is considered a maintenance expense for the rental
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properties and is immediately deductible but if you paint before putting the
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property in service the cost of the painting the property will need to be
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depreciated over 27 and a half years. Now here's a bonus one, not using property
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management software. To avoid making costly errors and getting the most out
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of your real estate tax benefits you need to be using the best systems in
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place so that you can track income and expenses run financial reports and keep
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an accurate audit proof detailed copy of all your records. There are plenty of
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ways to do this but the easiest by far is to utilize purpose like software
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purpose-built software like Landmall Studio. Now with Landmall Studio you can scan receipts with your phone to digitize them store them organize them
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online securely you can use the GPS mileage tracker for tracking travel
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expenses that's going to keep you a full detailed log our automatic bank feeds
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feature will dramatically reduce any manual data entry so you don't need to
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import bank statements etc and plus you can generate over 15 financial reports
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that are accountant and CPA approved for fast financial insights and a
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streamlined tax season. Learn more about how Landmall Studio can help you
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maximize your rental property ROI and simplify tax season at LandmallStudio.com that's LandmallStudio.com so if you enjoyed this video then click the like
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button below subscribe to our channel go and watch that and look at the rest of
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our videos on our feed here until next time we'll see you then
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