For many Roseville landlords, managing their rental property taxes often feels more complicated than managing their personal income taxes. It doesn’t have to be. If you’re working with a great property manager and an experienced CPA or tax accountant, you’re going to be in good hands. It’s more about the organization and knowing what you have to declare as income and what you can write off as losses.
Rental property owners need to know how to file their taxes. The IRS has specific rules about how rental income is treated. You also need to know what’s eligible for deduction, how to pay taxes on the sale of your rental property, and what kind of documentation will be necessary to keep in paper and electronic formats.
Here’s an overview of what you need to do leading up to tax time.
Filing Taxes on Rental Income
The IRS defines rental income as “any payment you receive for the use or occupation of the property.” The money you collect in rent will generally be taxed as ordinary income. What you pay will depend on your marginal tax bracket.
Obviously, your monthly rent is taxable. The IRS also expects you to pay taxes on other types of income associated with your rental properties, which may include:
- Advanced rent payments
- Portions of the security deposit that were kept
- Any expenses paid by tenants that aren’t legally required for them to pay
- Services provided by your tenants
Many successful rental properties may show lower income than what’s collected and even losses. This is due to the deductions landlords and owners can claim.
There will also be state income taxes to pay on rental properties, and the properties taxed will depend on whether you reside in California or another state.
Rental Property Deductions in Roseville
Rental real estate provides an abundance of tax benefits. You can probably deduct more with your real estate income than you can with any other investment. Make sure you’re taking advantage of all the available benefits.
Some of the most common deductions property owners take on their investment properties include:
- Interest that applies to the purchase or improvement of their property
- Professional services
- Pass-through deductions
- Travel and home office expenses
The 1031 exchange is another way to make the tax code work for you. It’s a benefit that allows you to defer the payment of capital gains taxes when you sell a property if you use the proceeds of that sale to invest in another rental property.
Documentation and Tax Reporting
Roseville property management companies can help you keep careful track of your income and expenses, presenting you with 1099 at tax time that you can use to file. If you’re managing on your own, make sure you have the invoices, statements, receipts, and records that are required to accurately file your tax return.
For federal returns, the IRS maintains a page on their website that directly addresses how to file your rental income and for state returns, the Franchise Board considers all rental income and losses as a passive activity, which means you’ll need to file form FTB 3801.
We are prepared to dive a bit deeper into each of these topics, and if you’d like any advice on your specific situation, we’d invite you to contact us at Action Properties. We are not accountants or tax attorneys, but as professional Roseville property managers, we work with owners and their taxes all the time.