A major reason for owning a rental property is the tax advantages, but many don’t end up utilizing the advantages because they get lost in the details. As a real estate investor you need to make sure to take advantage of all the benefits. The advantages are the deductions and expenses that go with your rental.
Keeping track of paper receipts and expenses can be simple if you find the right software solution. TenantCloud, Quick Books and some others have free software that helps you keep track of your receipts and categorize your expenses. Your time is very valuable, so don’t spend it at the end of the year digging for old receipts or old tax boxes. When making a purchase snap a photo on your accounting app and add it to the expense. By utilising cloud based apps you can make life easier and information more accessible when you want it.
Depreciation is not an annual cash-flow expense, but a deduction from your gross rent income. This helps in increasing cash flow while lowering the tax burden. To calculate your depreciation take the down payment on the house plus the loan outstanding (minus small costs for closing) and then divide by 27.5 and that is the amount you can expense each year.
If you have a loan on your rental then that is a great thing. Borrowing on your rental allows you to combine the depreciation expense with the interest paid on the loan to maximize your cash-flow while lowering your tax burden. It does it by allowing you to use money that would have been spent buying the house. It also allows renters to make rental payments of which are used to pay down your rental house while it appreciates in value.
Your car can be a great value in your rental business. If you drive your car to get any supplies for your rental, show your property to a prospective tenant, look at a maintenance request and any time you are driving somewhere for your rental it can be deducted from your rental income. The current allowable deduction is $0.575 per mile, which allows for gas, wear and tear, car washes, etc.
If you use a cloud based software for managing your rental then your phone expense, phone plan, home internet, laptop, are all expenses that can be portioned to a rental expense. Other materials and supplies that are used for the rental can be expensed. Educational expenses, which can include travel expenses, food and entertainment (50%) if you went to a seminar or anything in relation to being a landlord.
Being a landlord comes with ups and downs. Don’t let tax season be a downer. You can increase your tax deductions by finding current expenses from everyday life that involve your rental and itemizing those expenses. The key is to keeping track of them and now that there is cloud based rental accounting to help - your life gets easier.