Do you own an investment property in Georgia and collect rent payments from your tenant? If so, then the Internal Revenue Service (IRS) requires you to file your taxes.
You must file all rental income you’ve received on your tax return. And this can include more than just the rent payments you receive every month.
Filing taxes can be a complex process especially if you’re doing it for the first time. And in such a situation, it may be in your best interest to hire a professional to help you through the process.
The following is a guide to help you during this tax season.
What Should You Declare As Rental Income?
First and foremost, the IRS requires that you declare all rental income you receive. But how you declare it will be dependent upon the accounting system you use. For most people, the popular accounting method is “cash basis”.
According to the cash basis method, you report the income as you receive it and operational costs as you pay them out. Another option for accounting is the “accrual” method. With this method, income is counted when earned and not when it’s received.
With that in mind, if you are a landlord who is a private citizen, you’ll most likely use the former method. This means counting all the rental income you receive as income in the appropriate tax year.
According to the IRS, you must include all rental payments received. This includes any advance payments you have received.
Suppose that a tenant has signed a 2-year lease agreement with you, and the tenant pays you the entire first-year payment as well as some rent payments for the subsequent year. In this case, you’d need to report these rent payments as rental income in the year you received them.
Your tenant’s security deposit may also count as rental income. However, you can only do so in two circumstances: if you use it as last month’s rent or if you use part of it to compensate yourself for lease violations. Examples of such lease violations include excessive property damage or unpaid utility bills.
However, if you return the entire security deposit to the tenant, then it would not count as rental income.
What Expenses Can You Deduct?
You don’t need to pay more taxes than necessary. If you maximize all the available tax deductions available to you, you may be able to significantly shrink your taxes. More often than not, this can make the difference between earning a profit and losing money.
The following are some of the tax deductions available to Georgia landlords.
- Legal and professional services. Have you paid attorneys, accountants, real estate advisors, or a property management company? If so, you may be able to deduct those fees as operating expenses as long as the service offered was for your rental property.
- Insurance. Have you insured your rental property against any sort of liability? Common liabilities include theft, fire, and flood, as well as landlord liability. If so, then you can deduct the premiums you pay for such insurance covers.
- Home office. Provided the minimal requirements are met, you may be able to deduct your home office expense from the taxable income. And this deduction doesn’t just apply to a space you’ve devoted for office work. It also applies to any workspace, such as a workshop, that you use for rental activity.
- Travel expenses. Any driving you do for a rental activity entitles you to a tax deduction. For example, you can deduct the traveling expenses of having to go to the hardware store to buy a part for a repair. You have two options when it comes to deducting the traveling expenses. You can either deduct the actual expenses (repairs, upkeep, gasoline) or use the standard mileage rate.
- Personal property. You can deduct any personal property you use in a rental activity. Examples of these include gardening equipment, furniture, or appliances.
- Interest. Often, this is the single biggest deductible expense for landlords. One example of a tax-deductible interest expense is mortgage payments on a loan you may have used to buy or improve your rental property.
What Records Are Important For a Successful Tax Filing?
Tax season or not, keeping accurate records is crucial for landlords. Keeping organized records can help ease the stress that comes during the tax season. Tidy documents will ensure finding receipts and tracking deductible expenses is a smooth process.
The following are some of the records you’ll want to keep organized.
- Tenancy agreements
- Legal documents
- Property permits
- Property ownership documents
- Insurance policies
- Previous tax records
- Loan documents
Short-term documents are equally important in any tax season. Such documents include the following.
- Utility costs receipts
- Rent payment receipts
- Repairs receipts
- Legal fees
- Mortgage interest payments
- Rental advertising and listing costs
Now with this guide, we hope tax season is as stress-free as possible. However, should you need expert advice, Haas Properties can help. We’re a professional property management company that serves Woodstock, GA, and other surrounding areas.