Property Accounting

7 rental property accounting tips to keep more money in your pocket

It’s amazing how many people with rental properties, including CPAs, come to 360 Wealth Consulting looking for help on how to reduce their tax liability.

Usually, it’s about the time they’re facing a shocker amount owed to Uncle Sam.

Often, we can reduce their current year tax bill by tens of thousands of dollars or more by simply implementing some smart real estate accounting practices. Here are 7 tips to help you start giving less of your rental property income to the tax man:

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  1. Recapture depreciation every year. Whether or not you’re doing this annually on your tax returns, the IRS is going to be wanting their capital gains money when you sell. This isn’t an innocent until proven guilty court – Uncle Sam applies the same capital gains tax assumptions to everyone when a property is sold: the seller took advantage of depreciation tax laws. If you’re thinking of selling a property in the near future, or ever, make sure you’re recapturing depreciation on your tax returns annually. If you haven’t been doing this, you can go back and resubmit returns you’ve already filed.
  2. Expense the tools you use. It’s amazing how few rental property owners consider the equipment they use to maintain rental properties as a business expense. If you need to buy tools for plumbing, drywall, painting, flooring, or other repairs or improvements, these purchases are tax deductible.
  3. Write off appliances. Did you add a washer & dryer to a rental unit? What about a fridge? Has the stove stopped working, requiring a replacement? You’re entitled to include these as costs of doing business on your tax return.
  4. Factor in storage space. Renting a place to store your stuff is expensive. If what you’re keeping there is used for maintenance, repairs, replacements, or other concerns relating to your rental property, you can expense this on your tax return.
  5. Maintenance costs count too. Any supplies you buy to keep your rental properties in good repair should be logged and accounted for. You’ll be surprised how much you’re spending once you start keeping track of it. This includes both indoor and outdoor work you do.
  6. Upgrades & major improvements are a legitimate expense. Did you just replace a roof or an HVAC system? You’re allowed to deduct this on your taxes. Depending on the size of the project, you may be required to depreciate over time, but all this money will come back to you in the form of less taxes owed if you take the time to claim it.
  7. Trailers & vehicles can be deducted. If you bought a trailer to pick up and transport supplies for your rental property, that’s a business cost. If you’re not expensing it outright, make sure you track mileage on the vehicle you use for traveling to or from your properties or to pick up supplies to maintain the property. With 65.5 cents being the current reimbursement rate (2023), claiming mileage alone can account for $1000s of dollars in your pocket as you start counting miles you’re traveling to take care of rental unit concerns.

Tax law isn’t just about the numbers. It’s about interpretation and creative application. With properties seeing significant appreciation, it pays to get some help. What’s allowed with the latest changes in the tax law is complicated. Of, if you’re like many who yell “Yikes” when they review their tax return after a recent property sale, consider getting a second opinion. There may be ways to not only reduce the current years’ return tax burden, but also opportunities to amend prior year returns for better outcomes.

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